International Takeover

Weston, J., Mitchell, M., Mulherin, J. (2004). International takeovers and restructuring.
En Takeovers, restructuring,
and corporate governance ( pp.446 - 483 )(688p.)(4a ed). New Jersey : Pearson Prentice Hall(Prentice Hall Finance
Series,). (C48397)
CHAPTER17
INTERNATIONAL TAKEOVERS
AND RESTRUCTURING
he annual reports of individual business firms make increasing reference to intemational mar-
T kets as sources of future growth. The world has truly become a global marketplace. A signifi-
cant proportian of total takeover activity has an internatianal dimension. U. S. firms are buying for-
eign firms, foreign firms are buying U.S. entities, and U. S. and foreign firms are buying one another.
Table 17.1 displays data on trends in foreign versus U.S. merger activity during the period 1991
to 2001. M&A activity is grouped by the U.S. alone and by three categories of intemational
deals. As displayed in Panel A, all measures of M&A activity show a large positive trend in
activity through 2000, followed by a steep drop-off in 2001 dueto the global recession and stock
market plunge. With respect to relative activity, acquisitions by non-U. S. companies of U. S. com-
panies range from 5% to 11% of total M&A activity. U.S. company acquisitions of non-U.S.
companies are in the range of 4% to 7% of total world M&A activity. Deals not involving U.S.
companies, including cross-border and within-border transactions, account for 37% to 57% of
total world M&A activity. By dallar volume, total internati anal deals account for 52% to 68%
of total world activity. Measured by number of deals, the U.S.-alone category accounts for 22%
to 39% of M&A activity, with intemational deals accounting for 61% to 78%.
The main reason for the large levels of foreign M&A activity can be summarized briefly.
Eurape continues to become a common market thus, it continues to experience the kind of M&A
activity that took place in the United States when it first became a common market as a result of
the completion of the transnational railroad systems in the late-1880s. In addition to that is glob-
alization and the increased intensity of internati anal competition, which has been impacting U. S.
M&A activity, as well. The impact of rapid technological change and the consolidation of majar
industries represent additional forces for increased M&A activity throughout the world.
To give real-life content to the broad statistical compilations of these tables, we present tables
listing the 25 largest cross-border transactions in history, completed as of December 31, 2001,
for four categories. Table 17.2 presents data for cross-border transactions in which U.S. firms
446
,.
TABLE17.1 Foreign vs. U.S. Merger Activity, 1991-2001
Panel A. Do llar Volume
UNITED STATES INTERNATIONAL DEALS
U.S.Alone U.S. by Non-U.S. Non-U.S. by U.S. Deals outside U.S. Total International Total
$in %of $in %of $in %of $in %of $in %of $in
Year Billions Total Billions Total Billions Total Billions Total Billions Total Billions
01 $ 846 41.0% $ 189 9.2% $ 108 5.2% $ 920 44.6% $1,217 59.0% $2,063
00 1,308 36.7 337 9.5 141 4.0 1,779 49 .9 2,257 63 .3 3,565
99 998 42.0 247 10.4 150 6.3 979 41.3 1,376 58.0 2,373
98 1,005 48.1 221 10.6 117 5.6 749 35.8 1,086 51.9 2,092
97 626 46.5 86 6.4 85 6.3 550 40.8 721 53.5 1,348
96 516 48.1 70 6.5 61 5.7 426 39.7 557 51.9 1,072
95 285 41.1 54 7.8 47 6.7 308 44.3 409 58.9 694
94 205 44.8 46 10.1 24 5.1 183 40.0 253 55.2 458
93 131 40.9 22 6.8 19 5.9 149 46.4 189 59.1 320
92 95 32.3 15 5.2 15 5.2 168 57.3 199 67.7 294
Panel B. Number of Deals
UNITED STATES INTERNATIONAL DEALS
U.S.Alone U.S. by Non-U.S. Non-U.S. by U.S. Deals outside U.S . Total lnternational Total
No. of %of No.of %of No. of %of No.of %of No.of %of No. in
Year Deals Total Deals Total Deals Total Deals Total Deals Total Billions
01 4,241 21.5% 889 4.5% 1,084 5.5% 13,478 68.4% 15,451 78.5% 19,692
00 6,243 32.3 1,306 6.8 1,634 8.5 10,151 52.5 13,091 67.7 19,334
99 6,209 32.5 1,034 5.4 1,452 7.6 10,4~3 .. 54.5 12,899 67.5 19,108
98 7,584 39.1 922 4.7 1,586 8.2 9,329 48.0 11,837 60.9 19,421
97 6,030 36.8 777 4.7 1,336 8.2 8,227 50.3 10,340 63.2 16,370
96 5,453 37.0 652 4.4 1,127 7.6 7,517 51.0 9,296 63 .0 14,749
95 4,465 33.5 597 4.5 994 7.4 7,291 54.6 8,882 66.5 13,347
94 3,748 33.8 476 4.3 765 6.9 6,104 55.0 7,345 66.2 11,093
93 3,096 33.1 385 4.1 636 6.8 5,250 56.0 6,271 66.9 9,367
92 2,807 29.6 394 4.1 552 5.8 5,744 60.5 6,690 70.4 9,497
~ Source: Mergers and Acquisitions Annual Almanac, issues 1993- 2002.
~
.....
,;M;;tjorCross
_,-;;~ ' . ..
... 'ªorªer;,tTr~nsa~:tiohs:l
., ·.-· ·. ..:..~
- ---- _. ---""'·'
j_n;yolv1ng, t:)~s.: . Targ'éts ,
-= ., --~ -, -~,
" -. ~:..
. . ;:.. -- -· . . '2~_,._ ·- __.;.);
Val11e of
Date Date Target Acquirer Acq11irer Transaction
Annou11ced Effeclive Target Name Business Description Acquirer F111/ N ame Business Description Nation (in millions)
1 1/18/1999 6/30/1999 Air Touch Con1n1unications Mobile telecommunications Yodafone Group PLC Mobile telecomm. UK $ 60.287
2 8/11/1998 12/3111998 Amoco Corp. Oil and gas company British Petroleum Co. PLC Integrated oil and gas company UK 48.174
3 5/7/1998 11112/1998 Cbrysler Corp. Mfr. automobiles and trucks Daimler-Benz AG Mfr. automobiles and trucks GER 40,467
4 7/24/2000 5/3112001 YoiceStream Wireless Corp. Cellular conununications services Deutscbe Telekom AG Telecomn1. services GER 29.404
5 41111999 4/18/2000 Atlantic Ricbfield Co. Oil and gas exploration BPAmoco PLC Integra ted o il and gas company UK 27,223
6 5/2/2000 10/4/2000 Bestfoods Food producer Unilever PLC Food producer UK 25,065
7 7/12/2000 11/3/2000 PaineWebber Group Inc. Investment bank UBSAG Bank; investment bank SWI 16,542
8 12/7/1998 11130/1999 PacifiCorp Electric utility; telecom services Scottisb Power PLC Electric utility UK 12,600
<) 12/6/1999 5/23/2000 Ernst & Young LLP-Consulting Business Consulting services Cap Gemini SA Consult ing services FRA 11,774
10 8/30/2000 113/2001 AXA Financia] Jnc. Life insurance cotnpany AXA Group lnsurance con1pa ny FRA 11.189
11 2/18/1999 7/2111999 TransAmerica Corp. In surance cotnpany Aegon NY Insurance con1pany NETH 10,814
12 12114/2001 5/7/2001 USA Networks Jnc-Entertainment Assets TV stations Vivendi Universal SA Media, con1n1unications services FRA 10,749
13 1/15/2001 12/12/2001 Ralston Purina Co. Pet foods Nestle SA Chocolate and food producer SWI 10.479
14 11/30/2000 1122/2001 AT&T Wireless Group (partial interest) Wireless voice, data services NTT DoCoMo Inc. Telecon1m. services JPN \),805
15 6/18/1998 8/3111998 Bay Networks Mfr. date networking products Norte] Networks Corp. Mfr. telecomm. equipment CAN 9.269
16 11/30/1998 6/4/1999 Bankers Trust New York Corp. Banking Deutsche Bank AG Banking GER 9.082
17 9/5/2000 1/31/2002 Niagar¡¡ Mohawk Holdings Inc. Electric and gas utility National Grid Group PLC Electric utility UK 8.047
18 3/3111989 7/26/1989 SmithKline Beckman Corp. Mfr. pharmaceutical products Beechman Group PLC Mfr. pharmaceutical products UK 7,922
19 3/26/1987 7/7/1987 Standard Oil Co. of Ohio Oil and gas company British Petroleum Co. PLC Integrated o il and gas company UK 7,858
20 3/8/1999 5/12/1999 RJ Reynolds International (RJR Nabisco) Mfr. tobacco products Japan Tobacco Inc. Mfr. tobacco products JPN 7,832
21 5/10/1999 12/3111999 Republic New York Corp. Banking HSBC Holdings PLC Banking UK 7.703
22 7/20/2000 12/13/2000 Aetna !nc-Financial Services & Intl. Bus. Financia! services, insurance ING Group NY Insurance, brokerage services NETH 7.632
23 9/24/1990 11311991 MCA lnc. Motion picture production Matsushita E lectric Industrial Co. Mfr. home a udio, video products JPN 7.406
24 2/28/1995 7118/1995 Mm·ion Men·ell Dow (Dow Chemical) Mfr. pharmaceuticals HoechstAG M fr. chemicals and fibers GER 7.265
25 7/28/2000 10/5/2000 Alteon Websystems Inc. Internet solutions Norte! Networks Corp. Mfr. network solutions CAN 7.057
TOTAL= $411.645
So urce: Thomson.Finnncial Services.
CHAPTER 17 + lnternational Takeovers arid Restructuring 449
were acquired. Announcement and effective dates are given. The lag of effective dates behind
announcement dates ranges mostly from 4 to 10 months. The table gives the target and buyer
names plus a brief description of their business activities. All of these 25 transactions would be
classified as horizontal mergers. The predominance of these mergers became effective after
1997; only four took place prior to 1998. The predominance of the large mergers during the
recent time period is attributed to two factors: (1) the value of the transaction is based on nomi-
nal U. S. dollars, and thus the bull market of the 1980s and 1990s naturally results in larger trans-
actions during the latter years, and (2) high levels of merger activity during the latter-1990s.
Foreign acquirers of large U.S. companies were domiciled in 7 different nations, with 9 of the
25 mergers associated with U.K. acquirers.
In Table 17.3, we presenta similar analysis of the largest 25 transactions in which U. S. firms
acquired foreign firms. Almost all of these transactions are horizontal or consolidating mergers.
Eleven different countries accounted for the U. S. acquisitions of foreign firms, with Canada and
the U. K. accounting for the bulk of the acquisitions with 7 ea ch. The total of the 25 largest cross-
border acquisitions with U.S. acquirers is $151.5 billion, only 36.8% of the value of the trans-
actions in Table 17.2 in which U.S. firms were targets. This statistic reflects the protection that
foreign governments provide to target companies relative to the leveJ of protection provided
by the U. S. government to U. S. targets of foreign acquirers.
Table 17.4lists the top 25 in history in which cross-border transactions took place without
the involvement of U.S. firms. It can be readily seen that most of these transactions involve
European firms. The U.K.led the way with 6 target companies and 7 acquirer companies repre-
sented, followed by Germany with 4 targets and 3 acquirers. France and Switzerland were
active acquires with 5 and 4 acquisitions, respectively. Similar to the prior tables, these cross-
border mergers are largely of the horizontal category.
Although the focus of this chapter is on cross-border transactions, Table 17.5 presents the
25 largest intranational mergers by foreign companies. Japan and the U.K. domínate the top 25
with 7 transactions ea ch. Again, these mergers are largely of the horizontal type. Banking trans-
actions account for roughly half of the 25 mergers.
The cross-border transactions listed in Tables 17.2 through 17.4 can be placed in industry
groups, as shown in Table 17.6. We emphasize that the companies listed represent only the
largest transactions in each category. For example, in Appendix Ato Chapter 6 on the chemical
industry we present a list of companies with reason for merging or divesting in Table A6.2.
Similarly, we compiled an extended list of large M&As in the drug industry, as displayed in
Table 17.7. The majar reasons for the transactions listed in Table 17.7 were to combine comple-
mentary capabilities, to strengthen distribution networks, and to achieve the greater size
required for the new approaches to R&D.
The industries represented in the combined company listing in Table 17.6 can be regrouped
into eight categories. All have been greatly impacted by the broad forces of technological
change and the globalization of markets. These, in turn, have produced deregulation, the blur-
ring of industry boundaries, and unequal growth patterns among industries. These and other
industries' specific influences have combined to produce sorne high-takeover industries. The
industry characteristics related to M&A pressures can be summarized as follows.
l. Telecommunications: Technological change and deregulation in the United States and

abroad (particularly E urape) ha ve stimulated efforts to develop a global presence.
2. Media (movies, records, magazines, newspapers):Technological changes have impacted
the relationship between the content and delivery segments. Potential overlap exists in
~
(J1
o
TA~~a:g:;-t~7':~¿·~~M~ajo;
. '• ,.,. ' : ~ ....., ... : ;.. .· . . . -: • ·, g ,." . •· . A
Cross- Border Tran~actions -lnvolving l:J.S. Acquirers
Va fue of
Date Date Target Acquirer Transaction
Amzounced Effective Target Name Target Business Description Nation Acquirer Fu// N ame Business Description (in mil/ions)
3/211998 8/19/1998 Energy Group PLC Electric utility, coa] mining UK Texas Utilities Co. Electric and gas utility $ 10,947
2 6/14/1999 8/20/1999 ASDA Group PLC Op food; clothing superstores UK Wal-Mart Stores Inc. Mass merchandising retail 10,805
3 8/21/1995 11/2/1995 Pharmacia AB Mfr. pharmaceuticals SWE Upjohn Co. M fr. pharmaceutical products 6,989
4 1/28/1999 5/1111999 Lucas Varity PLC Provide engineering services UK TRW Inc. Provides advanced tech products 6,827
and serv ices
S 1/26/1999 3/5/1999 Japan Leasing Corp. Provide business credit services JPN General Electric Co. Conglomera te 6,566
6 1/28/1999 3/31/1999 Volve AB-Worldwide Psgr. Veh. Bus Mfr. passenger vehicles SWE Ford Motor Co. Mfr. autos, trucks, auto parts 6,450
7 5/2211995 2115/1996 CarnaudMetalbox SA Mfr. metal ca rs FRA Crown Cork & Sea] Co. Mfr. cans, crowns 4,982
8 4/13/1987 9/1/1988 Dome Petroleum Ltd . Oil and gas exploration production CAN Amoco Corp. Oil and gas exploration, production 3.616
9 31211998 4/30/1998 BTR PLC-Global Packaging & Materials Mfr. packaging AUS Owens-lllinois M fr. glass, plastic containers 3,600
10 1/26/1998 3/3/1998 N orcen Energy Resources Ltd. Oil and gas exploration production CAN Union Pacific Corp. Oil and gas exp loration, production 3 ,449
11 3/24/1999 6/1/1999 Bell Canada (BCE lnc.) Telecomm. services CAN Ameritech Corp. Telecomm. services 3.383
12 10/27/1997 1/20/1998 TeJe Danmark A/S Telecomn1. services DEN Ameritech Corp. Telecon1m . services 3.160
13 10/16/1998 1/31/1999 Telus Corp. Telecomm. equipment CAN Anglo-Canadian Telephone Co. Telecomm. eq uipment 3.107
14 1/28/1999 6/30/1999 JOS Fitellnc. (Furukawa Electric Co. Ltd .) Fiberoptics components JPN Uniphase Corp. Fiberoptics components 3.058
15 5/17/2001 8/6/2001 Grupo Financiero Banamex Acciva l SA Bank MEX C itigroup 1nc. Insurance con1pany 12.821
16 7/26/1999 5/30/2000 CWC Cons umerCo Provide telecomm. services UK NTL lnc. Provide con1mun ication services 11.004
17 4/11/2000 8/1/2000 Robert Fleming Holdings Ltd. Merchant bank UK Chase Manhattan Corp. Bank holding company 7.698
18 9/20/2001 3/14/2002 Westcoasl Energy lnc. Provider gas transmission serv ices CAN Duke Energy Corp. E lectric utility 7.422
19 12/15/2000 3/2/2001 Knoll AG (BASF AG) Mfr. pharmaceuticals GER Abbott Laboratories M fr. pharmaceuticals, med. equip. 6,900
20 5/29/2001 7/13/2001 Gulf Canada Resources Ltd. Oil and gas exploration production CA N Conoco lntegra ted oil company 6.300
21 2/12/2001 4/10/2001 Sema PLC Computer consulting, software UK Schlumberger Ltd. Energy services 5,300
22 11/1911997 1/16/1998 Mercury Asset Management Group PLC Investment manage1nent services UK Merrill Lynch & Co. Inc. Financia] services holding company 5.256
' 23 9/4/2001 11/8/2001 Anderson Exploration Ltd. Oil and gas exploration production CAN Devon Energy Corp. Oil and gas exp loration, production 4.562
24 12113/1999 3/28/2000 Cab lecom Holding AG Provider cable television services SWI NTL Inc. Provider comn1unication services 3.674
25 9/27/2000 12/12/2000 Pirelli SpA-Optical Compnts. and Devices Mfr. optical components ITA Corning Inc. M fr. cable, fibe r optic, glass 3,580
TOTAL $151.456
Source: Thon1son Financial Services.
TABLE 1 7 .4 Major lnternational Cross-Border Transactions (non-U.S.)
Value of
Date Date Target Acquirer Acquirer Transtlctiou
Amwunced Eifective Target Name Target Business Descriptio11 Natio11 Acquirer Fu// N ame Busi11ess Deseriptio11 Ntllion (in mil/ions)
11/14/1999 6/19/2000 Mannesmann AG Mobile telecomm. GER Voc.lafone AirTouch PLC Mobile telecomm. UK $202 ,71!5
2 5/30/2000 8/22/2000 Orange PLC (Vodafone Mobile telecomm. UK France Telecom SA Mobile telecomm. FRA 45 ,967
AirTouch PLC)
3 6/20/2000 12/X/2000 Seagram Co. Ltd. Mobile telecomm. CAN Vivendi SA Water utility, electric uti lity FRA 40,42X
4 12/9/1998 4/19/1999 Astra AB Mfr. pharmaceuticals SWE ZENECA Group PLC Chemicals UK 34,637
S 10/21/1999 1/12/2000 Orange PLC Provide radiotelephone UK Mannesmann AG Stee l proc..lucts GER 32,5'15
comn1. services
6 5/17/1999 12/15/1999 Hoechst AG M fr. chemical and fibers GER Rhone-Poulenc SA M fr. cheinica ls anU cosmetics FRA 21.<JIX
7 4/17/2000 10/16/2000 Allied Zurich PLC 1nsurance company UK Zurich Allied AG Insurance campan y and SWI 19,3'1'1
agency
8 10/13/1997 9/7/1998 BAT Industries PLC-Fin. Insurance agency. campan y UK Zurich Versicherungs GmbH 1nsurance holding company SWI IX,355
Srvc. Ops.
9 7/17/2000 12/29/2000 Airtel SA (increased stake) Mobile telecomm. SPA Vodafone AirTouch PLC Mobile te lecomm. UK 14,365
10 X/17/2000 2/16/2001 Viag lnterkom GmbH & Co. Mobile telecomm . GER British Telecommunication PLC Mobile telecomm. UK 13.XI3
(increased stake)
11 7/28/1999 10/1/1999 One 2 One (Cable & Wireless, Mobile telecomm. UK Deutsche Telecom AG Mobile telecomm. GER 13,629
MediaOne Grp.)
12 4/2911999 6/24/1999 YPFSA Oil and gas exploration ARO Repsol SA Petrol e um SPA 13 , 152
production
13 12/1/1998 61\1/1999 Petrofina SA Mfr. oil and petroleum BEL TotaiSA Oil and gas exploration FRA 12,769
and production
14 3/19/2001 6/29/2001 Billiton PLC Aluminum, zinc. nickel mining UK BHP Ltd. DiversifieU n1ining con1pany ALJS 11 ,5 11
15 4/1/2000 7/IX/2000 Credit Commercia1 de France Bank FRA HSBC Holdings PLC Bank holding company UK 11 , 100
16 2/15/2001 6/8/2001 De Beers Consolidated Diamond mining SAFR DS lnvestments lnvestment holc..ling company UK I1.07H
Mines Ltd.
17 5/21/1998 12/4/1998 Polygram NV (Philips Mfr. prerecorded records NETH Universal Studios Inc. (Seagram Co . Ltd.) Motion pictures CAN 10,236
Electronics)
18 1/13/2000 7110/2000 Telecommunicacoes de Mobile telecomm. BRA Telefonica SA Mobile telecomm. SPA 10,213
Sao Paulo SA
19 5/26/1997 3/5/1998 Corange Ltd. Mfr. pharmaceuticals BER Roche Holding AG Mfr. pharmaceuticals SWI 10,200
20 2/4/1999 6/27/1999 ABBAB Mfr. electrical equipment SWE ABBAG M fr. electrolyzers, electrical SWI 9,HI2
equip.
21 12/10/1999 2/24/2000 E-Plus Mobilfunk GmbH Mobile telecomm. GER BeiiSouth GJ1.1bH (KPN, BeiiSouth) Mobile telecomm. NETH 9,400
(Yodafone AirTouch)
22 3/26/2001 9/17/2001 Cable & Wireless Optus Ltd. Mobile telecomm. AUS Singapore Telecomm. Ltd. Mobile telecomm. SIN R,4HI
(Cable & Wireless)
23 2/20/1999 6/15/1999 Ing C Olivetti & Co. SpA- Mobile telecomm. ITA Mannes mann AG Steel products GER R,404
Telecom lnterests
24 8/19/1999 12/R/1999 Cies Reunies Electrobel et Electric and gas utility BEL Suez Lyonnaise des Eaux SA Water utility FRA H,I7H
Tractionel
25 12/19/2000 12/21/2001 Seagram Co.- Alcohol & Mfr. alcohol & spirits CAN Diageo PLC and Pernod Ricard SA Investor group UK H,l70
Spirit Division
TOTAL $600,605
~ Source:Thomson Financial Services.

CJ1
...l.
· -r:~~§tt.É"'~W-·,§_,,.· ,J;vlajqr
,_<"--·-''· ~'1i':'<oY,~,,~X"é>l:-' .". "-.-., __,...,,~·;·.,-_,.;_ _ ·- .
lntrar;tationai
:-::· ~-
.Trªr;l:_;>actions
.". '~~
____
,(non:-U.S.)
-~: ,.~ v.- '·
Value of
Date Date Target Acquirer Transaction
Announced Effective Target Name Nation Target Business Description Acquirer Fui/ N ame Business Descriptioll (in millions)
1 1117/2000 12/27/2000 SmithKiine Beecham PLC UK Mfr. pharmaceuticals Glaxo Wellcome PLC M fr. pharmaceuticals $ 75.961
2 11511999 3/27/2000 Elf Aquitaine FRA Oil and gas exploration, production Total Fina SA Oil and gas exploration, production 50,070
3 10/13/1999 4/112001 Sakura Bank Ltd. JPN Bank Sumitomo Bank Ltd. Bank 45,494
4 8/20/1999 9/29/2000 Oai-Ichi Kangyo Bank Ltd . JPN Bank Fuji Bank Ltd . Commercial bank 40,097
5 11/29/1999 3/13/2000 National Westminste r Bank PLC UK Bank holding company Royal Bank of Scotland Group Bank , bank holding company 38,525
6 2/29/2000 8/17/2000 Cable & Wireless HKT (Cable & Wireless) HK Provide telecomm. services Pacific Century CyberWorks Ltd. Internet service provider ( ISP) 37.442
7 2/20/1999 5/21/1999 Telecom Italia SpA (stake) ITA Prov ide te lecomm. services Ing C Olivetti & Co. SpA Provide telecomm . services, m fr. 34,758
office equipment
8 3/27/1995 4/111996 Bank ofTokyo Ltd. JPN Bank Mitsubishi Bank Ltd. Bank 33,788
9 . 8/20/1999 9/29/2000 Industrial Bank of Japan Ltd. (IBJ) JPN Bank Fuji Bank Ltd. Commercial bank 30,760
lO 317/1996 12/17/1996 Ciba-Geigy AG SWI Mfr. wholesal e pharmaceutical SandozAG Mfr. dyestuffs 30.090
products
11 8/2811989 4/2/1990 Taiyo Kobe Bank Ltd. JPN Bank Mitsui Bank Ltd. Bank 23.017
12 12/8/1997 6/29/1998 Schweizerischer Bankverein SWI Bank; investment b a nk Union Bank of Switzerland Bank; investment bank 23.009
13 4/112001 7/20/2001 Dresdner Bank AG GER Bank AllianzAG Insurance company 19,656
14 3/16/2000 11116/2000 Seat Pagine Gialle SPA ITA Publishing, Internet services Telcom Itali a SpA Provide telecomm. svcs. 18,206
15 5112/1997 12/17/1997 Guinness PLC UK Produce beer; publish books Granel Metropolitan PLC Prod. mil k, beer; own, op. pubs 15,968
16 8/30/1999 1/25/2000 Promodes FRA Own , opera te grocery stores Carre four SA Opera te retail grocery stores 15 ,837
17 1211611999 10/1/2000 Kokusai Denshin Denwa Corp. JPN Provide telecomm. services DO! Corp. Provide telecomm. services 15.822
18 10/9/1995 12/28/1995 Lloyds Bank PLC UK Bank TSB Group PLC Bank 15,316
19 3114/2000 4/112001 Tokai Bank Ltd. JPN Bank Sanwa Bank Ltd . Bank 14,984
20 5/4/2001 9/10/2001 Bank of Scotland PLC UK Bank Halifax Group PLC Provider financial svcs. 14,904
21 1/20/1995 5/111995 Wellcome PLC UK M fr. pharmaceuticals G laxo Holdings PLC M fr. pharmaceuticals 14,285
22 3/9/1999 8/6/1999 Paribas SA FRA Bank holding company Banque Nationale de Paris Bank 13,201
23 9/27/1999 6116/2000 VIAGAG GER Electric utility ; m fr. chemical VEBAAG Electric utility; holding company 13,153
24 1119/1999 11/29/1999 Marconi Electronic Systems (General UK Mfr. electronic equipment British Aerospace PLC Mfr. space vehicles, aircraft 12,863
Electrical)
25 5/31/1999 12/2/1999 Banca Commerciale Italia na SpA ITA Bank holding company Banca Intesa SpA Bank holding company 12,791
TOTAL $584.034
So urce: TI1omson Financia} Services.
CHAPTER 1 7 • lnternational Takeovers and Restructuring 453
TABLE 17.6 Industrial Classification of Selected Cross-Border Merg~~s

Telecommunications Oil
Vodafone-Mannesmann BP Amoco-Atlantic Richfield
Deutsche Telekom-VoiceStream Wireless British Petroleum-Amoco
Vodafone-AirTouch Communications Total-Petrofina
Ameritech-TeleDanmark Union Pacific-Norcen
Mannesmann-Olivetti (sorne units) Conoco-Gulf Canada
France Telecom-Orange
NTL-CWC Consumer Packaging
Crown Cork-CarnaudMetalbox
Media Owens Illinois-BTR (assets)
Seagram-Polygram
Vivendi Universal-USA Networks (assets) Electric
Matsushita Electric-MCA National Grid-Niagara Mohawk
Vivendi-Seagram Scottish Power-PacifiCorp
Texas Utilities-Energy Group
Financia) Suez Lyonnaise-Tractebel
Aegon-TransAmerica
HSBC Holdings-Republic New York Food
Deutsche Bank-Bankers Trust Nestle-Ralston Purina
UBS-PaineWebber Unilever-Bestfoods
GE Capital-Japan Leasing Diageo-Seagram (alcohol unit)
Merrill Lynch-Mercury Asset Mgt.
Retail
Pharmaceuticals Wal-Mart-ASDA
Upjohn-Pharmacia
Abbott Labs-Knoll Mining
Zeneca-Astra BHP-Billion
Roche-Corange DB Investments-De Beers
Hoechst-Marion Merrell Dow
Beechman-Smithkline Beckman
Autos
Daimler Benz-Chrysler
Ford-Volvo (passenger vehicles)
content of different media outlets. This is attractive and glamorous industry (attracted
Japanese companies beginning in late-1980s)
3. Financial (investment banks, commercial banks, insurance companies): Globalization of
industries and firms requires financial services firms to go global to serve their clients.
4. Chemicals and Pharmaceuticals: Both require extensive R&D but suffer rapid imitation.
Chemicals become commodities. Pharmaceuticals enjoy a limited period of patent protec-
tion but are eroded by me-too drugs and generics. Changes in the technology of basic
research and increased risks dueto competitive pressures have created the stimulus for
larger firms through M&As.
454 PART V + M&A Strategies
TABLE 17.7 Largest Recent Drug M&As

Deal
Date Value
Target (country) Acquirer (country) Announced (in billions)
SrnithKline Beecharn (UK/U.S.) Glaxo Wellcorne (UK) Jan. 17, 2000 $76
Warner-Larnbert (U.S.) Pfizer (U. S.) Nov. 4, 1999 70
Astra (SWE) Zeneca (UK) Dec. 9,1998 37
Ciba-Geigy (SWI) Sandoz (SWI) Mar. 7,1996 30
Pharrnacia & Upjohn (U.S.) Monsanto (U.S.) Dec. 20,1999 23
Hoechst (GER) Rhone-Poulenc (FRA) Nov. 16, 1998 22
Wellcorne (UK) Glaxo (UK) Jan. 20,1995 14
Synthelabo (FRA) Sanofi (FRA) Dec. 2,1998 11
Corange (GER) Rache (SWI) May 26,1997 10
American Cyanamid (U.S.) American Home (U. S.) Aug. 2,1994 10
Marion Merrell Dow (U. S.) Hoechst (GER) Feb.28,1995 7
Pharmacia (SWE) Upjohn (U.S.) Aug. 21, 1995 7
Knoll (GER) Abbott Laboratories (U.S.) Dec.15, 2000 7
So urce: Thomson Financia! Services.
5. Autos, Oil and Gas, and Industrial M-achinery: All face unique-difficulties that give advan-
tages to size, stimulating M&As to achieve critica! mass. Autos face global excess capacity.
Oil faces the uncertainty of price and supply instability dueto actions of the OPEC cartel.
6. Utilities: Deregulation has created opportunities for economies from enlarging geo-
graphic areas. New kinds of competitive forces have created the need to broaden manage-
rial capabilities.
7. Food, Retailing: Hampered by slow growth. Food consumption will grow only at the
rate of population growth. Expanding internationally offers opportunities to grow in
new markets.
8. Mining, Timber: Sources of supply are being exhausted. There are problems with matching
raw material supplies with manufacturing capacity.
-~-_,-r -~~-~---···.-· ~~ .:e=;· · .., - -·-<·-·_·· .,.."'."" _,., .•.• ," ,_.,,_.. ···" ··-·--···
• ~· ~'¡:,<•; _ ,;;·\'. ,_ .. ~ ._.,. . __ . . . . ._._ .... _ .... _,->-·· . _u , . ,. . " ,....'..~- ·-·---- - lt .,. .. <:-'<:>~- . ....._.._
. __ ·-· _ __ , ~:"< _,
EXAMPLES OF CROSS;;_BORD.ER TRANSAC.TIONS
_;,;_·~u.t~_,:_, -,~ 'r ·; ... <,.N.<- "; {,j}.·-\:, j~I.ct>'"'':t2g~·-·,.d/!L:\P::~:J:~·~:--::\L .<f,;,·· t "»
To convey further content and understanding of the forces operating in transnational M&As,
we present summaries of sorne of the leading cross-border transactions organized by the three
types covered in Tables 17.2, and 17.3, and 17.4.
DEUTSCHE TELEKOM AG-ONE20NE

ANNOUNCED JULY 28, 1999; EFFECTIVE OCTOBER 1, 1999; $13.629 BILLION
Deutsche Telekom (DT) acquired One20ne, Britain's smallest mobile telephone
business, which was jointly owned by London-based Cable and Wireless and
MediaOne Group. The deal allowed DT to shore up its presence in the changing
European telecommunications arena as it sought to expand beyond the competitive
German market into Britain and other high-growth regions.
CHAPTER 17 + lnternational Takeovers and Restructuring 455
The acquisition carne after DT had suffered a serious blow to its international strat-
egy when it failed to merge with ltalian phone giant Telecom Italia SpA, a setback
that also damaged its partnership with France Telecom S.A. DT was pressured to
revise its strategy when France Telecom agreed to invest $5.5 billion in British cable
operator NTL Inc. to gain a majar foothold in the British telecommunications market.
DT and other telecom giants were attracted to the British market not only for the
possibility of huge demands for their services but also for the prospects of technologi-
cal innovation. Both Britain and Japan were in line to be among the first countries to
offer the next generations of voice and data mobile phone services. These cutting-
edge services would not be available for the next 3 or 4 years, but the British govern-
ment planned to sell five licenses for such services by the end of 1999. By awning
One20ne, DT hoped to ha ve an edge in acquiring one of those licenses.
FRANCE TELECOM SA-ORANGE PLC

ANNOUNCED MAY 30, 2000; EFFECTIVE AUGUST 22, 2000; $45.97 BILLION
When the German conglomerate Mannesmann purchased UK telecom Orange PLC
in October of 1999 for a record $32.5 billion, it started a new wave of mergers and
acquisitions in the European telecommunications market. Soon after the deal, UK tele-
com Vodafone made a play for Mannesmann in another record-breaking deal worth
$203 billion. In arder to appease European Union regulators who feared Vodaphone's
oligopolistic dominace, Mannesmann was asked to divest itself of Orange. In addition,
EU rules barred Vodafone from holding two UK mobile phone licenses at one time.
France Telecom faced difficulties when strong relations with former ally Deutsche
Telekom dissolved and it lost bids for mobile licenses in Spain, in addition to its bid
for control of German-owned E-Plus Mobilfunk. France Telecom's interest in Orange
stemmed from Orange's extensive European network. At the same time, Vodafone
needed to spin off Orange as a separa te entity if it could not find a buyer quickly. The
sale to France Telecom quickly provided Vodafone with the sorely needed cash for
new mobile license purchases.
The deallaunched France Telecom toa new level. By combining France Telecom
and Orange's wireless operations, the new entity projected 30 million customers a
year, second only to Vodafone in Europe. The transaction continued to give Vodafone
a 9.9% indirect stake in France Telecom via Mannesmann in France, and the French
company acquired 1.3% ofVodafone's shares in Mannesmann. The complex deal was
sealed through a cash, share, and debt exchange. France Telecom paid Vodafone 55%
of the acquisition price in cash ($20.7 billion) and the rest in France Telecom shares.
France Telecom assumed $2.7 billion in debt and the $6.2 billion purchase of Orange's
third-generation license in the UK. The transaction diluted the French government's
63% stake in its leading mobile carrier to 54%. By acquiring Orange, France Telecom
finally gained footing in the British market and new wireless channels throughout the
rest of the European Union.
DEUTSCHE BANK AG-BANKERS TRUST NEW YORK CORPORATION

ANNOUNCED NOVEMBER 30, 1998; EFFECTIVE JUNE 4, 1999; $9.082 BILLION
Deutsche Bank's (DB) dominant position in Germany had eroded from increasing
competition and from the big American investment banks taking over the lucrative
work advising large European companies. DB needed to expand its investment
banking business, which was badly battered by its ill-considered acquisition of Morgan
Grenfell, and it needed to compete in the United Sta tes, the world's largest capital
market.
The acquisition of Bankers Trust (BT) secured a foothold in the United States. BT
had a middle-rank investment banking firm, BT Alex Brown, with a strong reputation
in underwriting young, high-tech companies. BT also had a sizable business issuing
high-yield bonds.
The deal created the world's largest financia! services company. The firm became a
globalleader in leveraged finan ce and one of the largest issuers of high-yield bonds.
lts portfolio included one of the largest global custody and processing business as well
as a huge asset-management operation.
The new company could reap the benefits of an expanding European market for
new stocks and high-yield corporate bond issues for smaller companies, especially as
the advent of a common currency was expected to boost European securities issuance
and trading volume. High-yield bonds also were attracting new interest as more
European companies underwent management buyouts.
UBS AG-PAINEWEBBER GROUP

ANNOUNCED JULY U, 2000; EFFECTIVE NOVEMBER 3, 2000; $16.542 BILLION
After several years of tumultuous scandal, re-invention, and change, UBS AG, a
Swiss global, integrated investment services firm and bank, set out to improve its
image worl~wide and establish itself as a serious European player in the U. S. mar ket.
UBS AG had been searching for the right acquisition to extend its global infrastruc-
ture into the United States and was strongly attracted to PaineWebber's substantial
retail distribution platform. Through PaineWebber's platform, UBS was able to capi-
talize on synergies relating to the sales of fixed income and structured products and
derivatives including the ability to provide investors with new access to IPOs and con-
vertibles. The merger created a stronger equity presence for both companies.
The companies believed that synergies also could be realized by using the expanded
retail base as an audience for its bond underwriting program. Like Morgan Stanley,
UBS AG now has a good audience for its electronic bond offerings. PaineWebber
brought 2.7 million new clients to UBS's customer franchise and approximately $490
billion in client assets. PaineWebber shareholders received $73.50 per share in cash or
0.4954 of UBS shares for every Paine Webber share. The merger helped boost product
offerings, increase distribution, and in crease assets under management.
With the purchase of Paine Webber, UBS also was able to improve its equity pro-
file. PaineWebber provided UBS with an elite client base in the United States. and
access to middle-American investors through PaineWebber's strong brand name
recognition. With Paine Webber's strong Main Street presence, UBS could emula te
the Merrill Lynch and Morgan Stanley Dean Witter models, which succeeded in
becoming household names by launching major media campaigns directed at the
average investor.
RHONE-POULENC SA-HOECHST AG
ANNOUNCED NOVEMBER 16, 1998; EFFECTIVE DECEMBER 15, 1999; $21.918 BILLION
The merger created Aventis SA, the world's largest life sciences company.lt
became the number 1 agrochemical company and one of the world's biggest pharma-
ceutical firms. By joining forces, the two companies could achieve the critica! mass
necessary to sustain an ambitious R&D program and the global marketing muscle to
push new drugs. The projected annual cost savings of more than $1 billion would allow
them to continue their profit growth until promising new drugs were in the pipeline.
The size of the combined company could attract a U. S. partner on an equal footing if
they decided to boost their presence in the American pharmaceuticals mark et.
Both companies were disposing of their industrial chemical operations in an
attempt to narrow their strategic focus to life sciences. Hoechst planned to spin off its
industrial chemical operation as a separate company named Celanese AG.
DAIMLER-BENZ-CHRYSLER
ANNOUNCED MAY 7, 1998; EFFECTIVE NOVEMBER U, 1998; $40.467 BILLION
As the automobile industry entered a period of brutal competition, Daimler-Benz
and Chrysler were trying to become a full-line global automobile company. The merger
signified huge economies of scale in engineering and purchasing, broader complemen-
tary product lines, and a worldwide network of manufacturing and distribution.
They combined the famous Mercedes-Benz line of luxury sedans and limousines
with Chrysler's mass-market cars and light trucks, including pickups, minivans, and
sport utility vehicles. Daimler was known for its engineering and techJ?-ical knowhow.
Chrysler had design and production expertise. The combination gave Daimler a huge
U.S. distribution network that the campany had lacked. Chrysler obtained a much
stronger base in E urape, where it had 1% of the Western European market compared
to 12% each for GM and Ford. Substantial cost savings would come from combined
purchasing operations, economies of scale in automobile components, and combined
technical product developments.
FORD MOTOR COMPANY-VOLVO AB-WORLD WIDE PASSENGER VEIDCLE BUSINESS

ANNOUNCED JANUARY 28, 1999: EFFECTIVE MARCH 31, 1999; $6.45 BILLION
The automotive industry was in a period of fierce consolidations and competition.
Ford Motor Company was the world's most profitable car and truck manufacturer. It
was the largest pickup-truck maker and the second-ranked producer of cars and
trucks, behind General Motors. Brands under its control included As ton Martín, Ford,
Jaguar, Lincoln, and Mercury. On the heels of the enormous Daimler-Benz-Chrysler
merger, Ford looked to acquire a campany that would help it intensify competition in
the luxury market and shore up its market presence in Europe. In March of 1999, it
completed a purchase of Volvo AB-World Wide Passenger Vehicle Business.
In this large, cross-border transaction, Ford expanded its economies of scale
through its ability to use Ford parts in Volvos and expanded delivery of all brands
through Ford's extensive distribution network. Ford acquired a distinctive brand in
the medium-priced luxury category that appealed toa younger baby boomer and
more affluent suburban audience. Traditionally, the Ford name had been synonymous
with the middle-class American buyer. E ven with the acquisition of Jaguar, Ford
lacked a strong presence in the more moderate luxury arena. Volvo's reputation for
quality, safety, and environmental responsibility were important to Ford's profile.
Synergies also helped Volvo, the second-largest manufacturer of heavy-duty trucks.
Ford's share in the European auto market moved from 10.2% to 11.9%, from sixth
place to second, trailing only behind Volkswagen AG. The merger signaled a contin-
ued trend toward restructuring in the global auto sector and placed pressure on
remaining European auto manufacturers to consolida te.
BRITISH PETROLEUM CORPORATION PLC-AMOCO CORPORATION.

ANNOUNCED AUGUST 11, 1998; EFFECTIVE DECEMBER 31, 1998; $48.174 BILLION
The merger of BP and Amoco carne at a time of low oil and chemical prices. Oil
companies were struggling to boost their profits but were unable to increase produc-
tion or find additional ways to cut costs. The merger added more oil reserves and
assets from which to squeeze out costs.
BP got Amoco's large reserves of oil and gas, which would ha ve taken BP an extra-
ordinary amount of time and capital to accumulate. The two companies were comple-
mentary. Amoco had lots of gas, and BP had lots of oil. Amoco brought in its U. S.
presence, and BP had extensive international assets. Amoco was the largest natural
gas producer in North America and had a vast U.S. gasoline marketing network. BP
had a huge worldwide exploration and production operation and a strong European
retail network.
The two companies could do more together than they could as stand-alone firms
and could do it more efficiently. There were plenty of possibilities for synergy: There
would be cost reductions from the elimination of duplica te operations, BP could bring
its expertise in deepwater exploration and production to Amoco's fields in the Gulf of
Mexico, and BP could combine its cheaper finding cost with Amoco's lower develop-
ment costs. The cost savings were projected to amount to $2 billion annually by the
end of 2000.
The size of the new company made it comparable to Exxon and Royal Dutch.lt
could give BP even greater market dout, enabling it to finance more development,
keep costs down, and help win more auctions of oil reserves.
TOTAL SA-PETROFINA SA
ANNOUNCED DECEMBER 1, 1998; EFFECTIVE JUNE 9, 1999; $12.77 BILLION
In ayear marked by megamergers in the petroleum sector, the merger between
Belgian oil group Petrofina SA and French oil group Total SA saw the creation of the
fifth-biggest oil group in the world. Weak oil prices and industry consolidations put
pressure on oil companies to seek mergers to capitalize on greater economies of scale.
Total and its French rival Elf Aquitaine engaged in a bidding war over the Belgian
concern. After several rounds of bidding. Total paid a premium price of $12.77 billion
in a cash and 9-for-2 stock swap for Petrofina.
Petrofina, though midsize, was a strong presence in refining and marketing and
continued to outperform companies in its peer group. In addition, it had strong links
to the petrochemical industry. This was a solid complement to Total, a company with a
concentration on oil, coal, and uranium reclamation and exploration.
The new entity, under the name Totalfina, sold off nonstrategic assets to finance its
development program for exploration and production and was able to combine its
refining capacity to 1.6 million barreis per day. It immediately realized cost savings
by streamlining business ventures, office integration, tax benefit optimization, and
improvement in financing charges linked through Total's superior, long-term debt
rating.
The deal was almost derailed when the companies filed for EU regulatory
approval. The companies withdrew notification when they suspected that the commis-
sion would launch a full investigation, potentially delaying or rejecting approval. By
making modifications in the fuel-storage arena, Total negotiated approval with the
commission, and the EU authorities approved the merger shortly befare the deal
el ose d.
UNION PACIFIC RESOURCES GROUP-NORCEN ENERGY RESOURCES LIMITED

ANNOUNCED JANUARY 26, 1998; EFFECTIVE MARCH 3, 1998; $3.449 BILLION
Canada's weak currency had made acquisition opportunities much more attractive.
In addition to the lower acquisition prices, Canada's energy businesses received much
of their revenues in U. S. dollars although their expenses were in Canadian dollars.
Union Pacific Resources, an independent oil and gas company, acquired the
Canadian oil producer Norcen Energy. Union Pacific Resources was trying to diver-
sify its reserve portfolio. After its failed attempt to acquire Pennzoil, the weakness of
the Canadian dallar allowed it greater leverage in its bid for N orcen. The deal gave
Union extensive oil and natural gas reserves in western Canada and the Gulf of
Mexico, and exploration acreage in Venezuela and Guatemala. This represented a
doubling of its reserves, access to international operations, and a lessening of investor
fear that Union's aggressive drilling and production strategy would deplete the capital
needed to replace reserves over the long run. ;
SCOTTISH POWER PLC-PACIFICORP

ANNOUNCED DECEMBER 7, 1998; EFFECTIVE NOVEMBER 30, 1999; $12.60 BILLION
The deal represented the first majar foreign acquisition of a U. S. electric utility. It
was driven by globalliberalization of electricity markets. Scottish Power became one
of the world's 10 largest electricity and utility companies. The campany has been look-
ing to acquire a U.S. utility for sorne time. Its officials believed that the United States
was 4 to 5 years behind the United Kingdom in deregulating its power markets and
that the U.S. industry was ripe for consolidation. Deregulation activity also was occur-
ring in continental E urape, but Scottish Power believed the U.S. market offered better
potential.
TEXAS UTILITIES CORPORATION-ENERGY GROUP PLC

ANNOUNCED MARCH 2, 1998; EFFECTIVE AUGUST 19, 1998; $10.947 BILLION
As the U.S. market continued to deregulate, U. S. electric utilities were trying to find
new sources of revenues as they were forced to open their service area to competitors.
U.S. electric utilities had been purchasing British utilities since the United Kingdom
privatized the industry in 1990. They were looking for cash-rich utilities in a more
relaxed regulatory environment with high growth prospects.
Texas Utilities decided toen ter the UK market for the first time. The deal allowed
it to become a major player in Britain, which opened its electricity market to full
retail competition in late 1998. Texas Utilities was able to bid successfully over
another American suitor, PacifiCorp. The acquisition doubled Texas Utilities's
revenues and gave it the necessary marketing muscle to compete in Britain and pos-
sibly en ter into other European markets.
NESTLE SA-RALSTON PURINA

ANNOUNCED JANUARY 15, 2001; EFFECTIVE DECEMBER 12, 2001; $10.479 BILLION
Swiss food giant Nestle's acquisition of Ralston Purina created the largest, publicly
owned, pet-food producer. Already the world's largest human-food campan y, Nestle
wanted to shore up its 12% share in the pet-food market by acquiring Ralston Purina,
which had strongannual sales of $2.76 billion and 27% control of the pet-food mar-
ket. The deal carne during a flurry of food-industry consolidations, and signaled a
commitment by the two companies to capitalize on growth trends in the dog- and cat-
food industry. Analysts speculated that dog and cat food were the two highest-growth
are as in the food industry, with overall sales increasing 5% in 2000 alone. The longer-
term growth estima te was seen as a possible 6.5% annually, twice as fast as the pro-
jected growth figure for the human-food sector. Trends indicated that the pet-food
industry, unlike the human-food sector, was generally impervious to market down-
falls: Trends saw owners as resistant to shortchanging their pets even in tougher eco-
nomic times. Nestle paid 36% over Ralston's final previous closing price in an all-cash
$33.50-per-share deal, or $10.48 billion. The street believed that at 15 times earnings
befare interest, taxes, depreciation, and amortization (EBITDA), it was a fair price
considering the potential synergies between the two companies. Ralston Purina had
become more attractive when it spun off its Energizer division. The acquisition clearly
signaled Nestle's targeted desire to accelerate dominance, growth, and performance in
the pet-food market.
The deal resulted in combined yearly sales of $6.3 billion. By combining their mar-
ket power, they wanted to presenta fullline of strong brands including Puppy Chow,
Tender Vittles, Purina One, Friskies, and Alpo through which they could domina te
supermarket shelf space and gain added influence with retailers while cutting
expenses in distribution and product development.
WAL-MART STORES INCORPORATED-ASDA GROUP PLC

ANNOUNCED JUNE 14, 1999; EFFECTIVE AUGUST 20, 1999; $10.805 BILLION
Wal-Mart, the giant retailer, was trying to gain critica! mass outside the United
States. Wal-Mart had expanded to severa! countries but had not achieved a dominant
position except in Mexico and Canada. The acquisition of the British supermarket
chain ASDA Group gave it a strong presence in Europe and fulfilled its long-standing
goal of doubling its international business. Wal-Mart achieved immediate economies
of scale and got a chain of stores with a nearly identical operating strategy. The deal
shifted European retailing to a more efficient, low-price, long-hours model that could
allow Wal-Mart to domina te its competitors.
,.:;;..:'
'
FORCES DRIVING CR.0 9Sf'B>ORD.E RM.ERGERS
The data and examples just presented provide a basis for identifying the major torces driving
cross-border mergers. Sorne of the forces are similar to those for purely domestic transactions,
whereas others apply more strongly to international M&As. We first outline 10 major forces to
serve as a road map for the discussion that follows.
l. Growth
2. Technology
3. Advantages in differentiated products
4. Roll ups
5. Consolidation
6. Government policy
7. Exchange rates
8. Political and economic stability
9. Following clients
10. Diversification
GROWTH
Growth is the most important motive for international mergers, and it is vital to the well-being
of any firm. Mergers provide instant growth, and merging internationally adds a whole new
dimension to this instant growth. The size of a market and the growth rates of markets are rele-
vant for achieving growth objectives. The United States had long been highly regarded by for-
eign firms for exports, direct investment, and M&As beca use of its large and attractive markets.
Firms in the United States have looked abroad to countries in relatively earlier stages of their
life cycles, characterized by industries with rates of growth higher than in the United States.
This has been especially true of U.S. food companies.
Leading firms in the domestic market might have lower costs be(:ause of economies of
scale. Overseas expansion might enable medium-size firms to att¡ain the size necessary to
improve their ability to compete. Finally, even with the most efficient management and tech-
nology, the globalization of world markets requires a critica! size level to ,even be able to carry
out worldwide operations. Size enables firms to achieve the econom:ies of scale necessary for
effective global competition. Most of the firms listed in Table 17.6, whose characteristics were
conveyed in our summary descriptions, were motivated by growth objectives in their interna-
tional M&As.
TECHNOLOGY
Technological considerations impact international mergers in two ways: (1) a technologically
superior firm may make acquisitions abroad to exploit its technological advantage, or (2) a
technologically inferior firm may acquire a foreign target with superior technology to enhance
its competitive position at home and abroad. 1t is generally accepted that for an investment
project (in this case, the acquisition of a foreign firm) to be acceptable, the present value of
benefits must exceed the present value of costs.lf an asset (the target firm) is priced correctly,
the present value of benefits should equal the present value of costs. For positive net present
values to occur, an acquiring firm must be able to buy the target for less than the present value
of its benefits (the target must be underpriced) orbe able to increase the present value of
future benefits.lt is unlikely that target firms are systematically underpriced (e ven if they were,
underpricing would be more difficult to detect in foreign firms in an unfamiliar market than in
domestic firms). Hence, the acquiring firm must bring something to the target that will increase
the present value of benefits, or the target firm must bring something to the acquirer that
enables the combined benefits of the merged firm to be greater than the sum of what the indi-
vidual firms could ha ve achieved separately. It must exhibit synergy.
In domestic mergers, increased benefits often result when the superior management effi-
ciency of the acquiring firm is applied to the target firm's assets. In international mergers, the
acquiring firm might have an advantage in general management functions such as planning and
control or research and development. However, capabilities in specific management functions
such as marketing or labor relations, for example, tend to be environment specific and are not
readily transferred to different surroundings. Such factors might help explain the predominance
of the United Kingdom and Canada as international merger partners of the United States; that
is, the common language and heritage and similar business practices minimize the drawbacks,
making súch skills more transferable. Likewise, note that none of the 25 large, non-U.S. cross-
border transactions involved European firms merging with Asían firms.
Technological superiority, on the other hand, is a far more portable advantage and can be
exploited more easily without a lot of cultural baggage. The acquirer might deliberately select a
technologically inferior target that, because of this inferiority, is losing market share and thus
market value. By injecting technology into the acquired firm, the acquirer can improve its com-
petitive position and profitability at home and abroad. Most of the firms in our sample also
were strongly motivated by technology considerations. Sorne sought to buy into foreign mar-
kets to exploit their technological knowledge advantage. The Wal-Mart-ASDA transaction is
an example. By using its superior inventory technologies, Wal-Mart could achieve lower prices.
This would be a basis for expansion into widening foreign markets.
A primary motive for cross-border transactions is to acquire new technologies. This was
true of many of the chemical, pharmaceutical, oil, and auto mergers. Renault's investment in
Nissan was motivated in part by the desire to learn sorne of Nissan's manufacturing techniques,
as well as to establish a presence in Japan.
ADVANTAGES IN DIFFERENTIATED PRODUCTS
A strong correlation exists between multinationalization and product differentiation (Caves,

1982). This may indica te an application of the parent's (acquirer's) good reputation. A firm that
has developed a reputation for superior products in the domestic market might find accep-
tance for the products in foreign markets, as well. In the 1920s, the early days of the U.S. auto-
mobile industiy, cars were exported tó Europe in large numbers. This was befare the auto
industry was developed in European countries. The advantage of the U.S. mass-production
facilities and know-how made the American cars cheaper despite the high foreign tariffs and
motivated foreign direct investments. The tables were then turned. First, Volkswagens carne
from Germany to the United States. Then cars from Japan became widely accepted in the
United States. Later, manufacturing operations were established by foreign makers in the
United States. In the other direction, Ford's acquisition of Jaguar brought modern assembly
lines and other production systems to achieve improved design, quality, and costs to the Jaguar
operations.
ROLL UPS
Roll ups to combine firms in fragmented industries have been taking place within the United
States, as well as internationally. US Filter had achieved a roll up of water-improvement facili-
ties in the United States. In early 1999 U. S. Filter was acquired by Vivendi, a French conglomer-
ate. Similar motives appear to be at work in the energy industry, as exemplified by Scottish
Power's acquisition of PacifiCorp. The acquisition by Texas Utilities of the UK Energy Group
in 1998 reflected deregulation of energy markets, which created opportunities for energy indus-
try roll ups abroad as well as in the United Sta tes.
CONSOLIDATION
The ultima te aim of consolidation M&As. has be en to reduce worldwide excess capacity. The
Daimler-Chrysler merger is a prime example.
GOVERNMENT POLICY
Government policy, regulation, tariffs, and quotas can affect international mergers and acquisi-
tions in a number of ways. Exports are particularly vulnerable to tariffs and quotas erected to
protect domestic industries. Even the threat of such restrictions can encourage international
mergers, especially when the market to be protected is large. Japan's huge export surplus, which
led to voluntary export restrictions coupled with threats of more binding restrictions, was a
majar factor in increased direct investment by Japan in the United States.
Environmental and other governmental regulations (such as zoning, for example) can
greatly increase the time and cost required to build facilities abroad for de novo entry. The
added cost of compliance with regulation amplifies other effects that may be operating. Thus,
the rationale for acquiring a company with existing facilities in place is reinforced by regulation.
The Deutsche Telekom acquisition of One20ne is an example of the many influences of
government policy. Deutsche Telekom had be en a monopoly protected by the German govern-
ment. German deregulation created competition from international and German firms.
Similar!y, Deutsche Telekom acquired One20ne beca use of the possibility of purchasing a cov-
eted mobile phone license from the British government. The influe~ce of government policy
J
also is reflected in the European Union's decision to open previously regulated industries, such
as electric utilities, to competition.
EXCHANGE RATES
Foreign exchange rates affect international mergers in a number of ways. The relative strength
or weakness of the domestic versus foreign currency can ha ve an impact on the effective price
paid for an acquisition, its financing, production costs of running the acquired firm, and the
value of repatriated profits to the parent. Accounting conventions can give rise to currency
translation profits and losses. Managing exchange rate risk is an additional cost of doing busi-
ness for a multinational firm. The acquisitions by Union Pacific Resources and the CIT Group
(both U. S. companies) of Canadian firms were facilitated by the decline in the value of the
Canadian dallar in 1998 and 1999.
POLITICAL ANO ECONOMIC STABILITY
The relative political and economic stability of the United States has been an important factor
in attracting foreign buyers. Political and economic instability can increase greatly the risk of
what is already a riskier situation than purely domestic investments or acquisitions. Acquiring
firms must consider the frequency with which the government changes, how orderly the trans-
fer of power is, and how much government policies differ from one administration to the next,
including the degree of difference between the dominant political pa_rties. They must assess the
likelihood of government intervention on the upside and the downside (for example, subsidies,
tax breaks, loan guarantees, and so forth, on the one hand, all the way to outright expropriation
on the other hand).
Desirable economic factors include low, or at least predictable, inflation. Labor relations
are another important consideration in economic stability. Western European labor unions
appear to ha ve a greater voice in the management of companies than do American unions.
The United States excels in virtually every measure of economic and political stability
(except exchange rate uncertainty in early 2003).1t is also a superior target because of the size
and homogeneity of the market and the sophistication of the infrastructure. Transporta-
tion and communications networks in the United States are among the best in the world; the
depth and breadth ofU.S. financia! markets are attractive; there is little risk of expropriation.
lndeed, most states offer inducements to investment, and the labor force is relatively skilled
and tractable. The high levels of foreign acquisitions described in Table 17.2 provide many
examples.
FOLLOWING CLIENTS
The importance of long-term financia! relationships is a majar factor in international mergers

in the financia! services industry. If enough of a financia! firm 's clients move abroad, it makes
economic sense for the firm to expand abroad, as well. Foreign firms abroad might want to
remain loyal to their long-standing, home country banks. However, if a financia! firm does not
ha ve offices available for servicing its clients, it runs the risk of losing business to more conve-
nient, local financia! firms.
For sorne time, foreign financia! services firms operating in the United States hadan advan-
tage over U. S. firms, especially in interstate banking, in that they were allowed to ha ve branches
in more than one state (with restrictions) , whereas this was denied to U.S. banks. Over the
years, the playing field has become more equal. Because of their weak presence in the United
States, especially in investment banking, Deutsche Bank acquired Bankers Trust and UBS
acquired Paine Webber. Similar! y, Ownes-Illinois's foreign acquisitions were made in part to
support their majar industrial customer as they expanded their businesses worldwide.
DIVERSIFICATION
International mergers can provide diversification geographically and by product line. To the
extent that various economies are not perfectly correlated, merging internationally reduces the
earnings risk iríherent in being dependent on the health of a single domestic economy. Thus,
international mergers can reduce systematic as well as nonsystematic risk. The cross-border oil
mergers have provided geographic diversification, as well as opportunities for reducing excess
capacity, increasing efficiency to reduce costs, and achieving the larger size required by global
operations.
PREMIUMS PAlO
Academic studies as well as the Mergerstat data show that foreign bidders pay higher premiums
to acquire U. S. companies than the average of premiums paid in total acquisitions. In the Harris
and Ravenscraft (1991) study of a sample of companies between 1970 and 1987, foreign bidders
paid higher premiums by 10 percentage points. They found also that high foreign currency val-
ues led to increased premiums. Their data show that when foreign firms buy U. S. firms, they con-
centrate on research and development intensive industries. They found that the R&D intensity
of foreign acquisitions is 50% higher than in purely domestic transactions. The Harris and
Ravenscraft study found also that U.S. bidders earn only normal returns in both domestic and
cross-border acquisitions. These results are consistent with other studies of bidder and target
returns.
In Table 17 .8, we pick up with 1987, the final year of the Harris and Ravenscraft study. A
simple average of the percentages in Table 17.8 shows that the premiums in foreign acquisitions
exceeded the average of all acquisitions by about four percentage points. One reason offered as
an explanation is that foreign buyers offer higher premiums to preempt potential domestic bid-
TABLE 17.8 Mean Premium in Foreign vs. Total

Announcements, 1987-2001
Year Foreign Acquisitions Al/ Acquisitions
1987 39.4% 38.3%
1988 56.2 41.9
1989 38.9 41.0
1990 48.1 42.0
1991 39.8 35.1
1992 54.1 41.0
1993 41.8 38.7
1994 46.2 41.9
1995 41.9 44.7
1996 47.8 36.6
1997 33.0 35.7
1998 45.2 40.7
1999 43.2 ~3.3
2000 53.8 49.2
2001 60.0 57.2
1987-2001 average 46.0% 41.8%
Source: Mergerstat Review, 2002.
ders. Another possible reason is that U.S. targets have less knowledge of foreign buyers and
need a higher premium to resol ve sorne uncertainty. A third possible influence is that prospec-
tive future exchange rate movements give an edge to the U.S. dollar.
EV EN T RETURNS
An early study (Doukas and Travlos, 1988) found that the announcement of international
acquisitions was associated with positive abnormal returns for U.S. multinational enterprises
that previously had not been operating in the target firm's country. When American firms
expand internationally for the first time, the event returns are positive but not significan t. When
the American firm already has been operating in the target firm's home country, the event
returns are negative but not significant. Shareholders of multinational enterprises gain the
greatest benefits from foreign acquisitions when there is simultaneous diversification across
industries and geographically.
Harris and Ravenscraft (1991) investigated shareholder returns for 1,273 U.S firms
acquired during the period 1970 to 1987. They found that in 75% of cross-border transactions,
the buyer and seller were not in related industries and that the takeovers were more frequent
than domestic transactions in R&D-intensive industries. The percentage gain to the U.S. targets
of foreign buyers was significantly higher than to the targets of U.S. buyers. The cross-botder
effects were positively related to the weakness of the U.S. dollar, indicating an important role
for exchange movements in foreign direct investment.
A study of Japanese takeovers of U.S. firms (Kang, 1993) found that significant wealth
gains are created for both Japanese bidders and U. S. targets. Returns to Japanese bidders and to
a portfolio of Japanese bidders and U. S. targets increased with the leverage of the bidder, the bid-
der's ties to financia! institutions, and the depreciation of the dollar in relation to the Japanese yen.
A study that controlled for relative corporate wealth and levels of investment in different countries
found no statistically significant relationship between exchange rate levels and foreign investment
relative to domestic investment in the U. S. chemical and retail industries (Dewenter, 1995).
Eun, Kolodny, and Scheraga (1996) studied 225 foreign acquisitions of U.S. firms that
occurred during the period 1979 to 1990. For an 11-day event window, (-5, +5), the CAR was
37.02% for the whole sample of U. S. targets, significant at the 1% level. Those acquired by firms
from countries other than Japan were similar, with a CAR between 35% and 37% Cakici,
Hessel, and Tandon (1996) examined the wealth gains for 195 foreign firms that acquired U.S.
target firms during the period 1983 to 1992 compared to a sample of 112 U. S. acquisitions of for-
eign firms during the same period. The foreign acquiring firms experienced positive CARs of
0.63% for a 2-day period, (0, +1), and 1.96% over a (-10, +10) window, both significant at the
1% level. Meanwhile, the U.S. acquirers had negative CARs of -0.36% and -0.25%, respec-
tively, neither being significan t.
Doukas (1995) used a sample consisting of 234 U.S. bidding firms involved in 463 interna-
tional acquisitions over the period 1975 to 1989 to study the relationship between bidders
shareholders gains and their q-ratios. The sample was divided into value maximizers and over-
investors based on Tobin's q. The 2 da y (-1, O) CAR for firms with average q-ratios greater than
1 (value-maximizing firms) was 0.41 %, significant at the 5% level. Bidders with average
q-ratios less than 1 (overinvested firms) hada negative CAR of -0.18%, not significant. The dif-
ference was significant at the 1% leve l. The impact of exchange rates was consistent with Froot
and Stein's (1991) hypothesis of a negative relationship between the dallar exchange rate and
the level of foreign direct investment. The method of payment and industry relatedness did not
appear to be significant.
Seth, Song, and Pettit (2000) studied a sample of 100 cross-border acquisitions of U.S. tar-
gets during 1981 to 1990. The average CAR of acquirers was 0.11% for an event window (-10,
+10), not statistically significan t. For targets, the average CAR was 38.3%, significant at the 1%
level. Hudgins and Seifert (1996) looked at the announcement gains and losses for a sample of
88 American acquirers and 72 American targets involved in cross-border transactions of finan-
cia! firms during 1968 to 1989. Announcement effects for U.S. financia! firms acquiring foreign
firms were not significant and were not statistically different from the effects experienced by
U.S. financia! firms acquiring domestic firms. Target shareholder of foreign bids gained signifi-
cant positive returns of 9.2%.
Markides and Oyon (1998) used a sample of 236 acquisitions made by U.S. companies in
the period 1975 to 1998. The total sample consisted of 189 U.S. acquisitions in Europe and 47
U.S. acquisitions in Canada. Using standard event-study. methodology, they found significant
but small gains for the acquiring firms. For a 2-day event window (-1, O) the acquirers' CAR for
the whole sample was 0.38%, significant at the 5% level. However, the gains carne from conti-
nental European acquisitions, a CAR of 0.47% significant at the 10% level. Canadian and
British acquisitions created no significant value for the acquiring U.S firms. Wider event win-
dows, (-5, +5) and (-10, +10), yielded positive nonsignificant CARs for all cases.
In one study, Eckbo and Thorburn (2000) examined 390 acquisitions of Canadian targets by
U.S. acquirers over the period 1962 to 1983 and documented negative (-0.19 percent) and
insignificant abnormal returns during the month of the merger announcement.
Finally, a paper by Moeller and Schlingemann (2002) used a large sample of 4,430 mergers
between 1985 and 1995 to compare and contrast cross-border acquisitions from domestic
acquisitions for U.S. acquirers. Moeller and Schlingemann found that U.S. acquirers realize sig-
nificantly lower stock returns and operating performance for cross-border acquisitions than for
domestic acquisitions.
Event studies involving U. S. buyers of foreign targets and foreign buyers of U. S. targets gave
results similar to those of domestic transactions. Targets received large abnormal returns regard-
less of the direction of the transactions. Buyers similarly earned nonsignificant percentage returns
regardless of whether they were U. S. firms of foreign firms engaged in cross-border acquisitions.
INTERNATIONAL JOINT VENTURES
International joint ventures magnify the potentials and the weaknesses of joint ventures. In
general, joint ventures should involve complementary capabilities. The risks posed by different
cultural systems among firms from different countries might increase the tensions normally
found in joint ventures.
Despite the increased challenges of international joint ventures, the advantages of joint
ventures can be expanded. Sorne of the particular benefits of international joint ventures may
be noted (Zahra and Elhagrasey, 1994): (1) The joint venture might be the only feasible method
for obtaining access to raw material. (2) Different historical backgrounds and different man-
agerial and technological skill might be associated with firms ín different countries.
International joint ventures, therefore, may in vol ve different capabilities and link together com-
plementary skills. (3) Having local partners may reduce the risks involved in operating in a for-
eign country. (4) The joint ventures might be necessary to overcome trade barriers. In addition,
sorne of the advantages of domestic joint ventures might be enhanced. These include the
achievement of economies of scale in providing a basis for a faster rate of corporate growth.
Management style may be different for companies from different countries. However, it
appears that over time there has been increasing convergence of western and Asian manage-
ment styles(Swierczek and Hirsch, 1994). In the past, the basic values of western management
emphasized the individual, legal rules, and confrontation. In contrast, the Asian approach
emphasized the group, trust, and compromise. With regard to management style, the western
approach was emphasized by rationally and structured relationships. The Asian approach
involved relationships, consensus, flexibility, and adaptive behavior. Over time, however, a con-
vergence of the different management styles has been taking place.
Because of the complexity of relationships of international joint ventures, sorne principies
have been suggested for the management of successful collaborations (Shaughnessy, 1995).
Because joint ventures are a temporary alliance for combining complementary capabilities,
joint venture contracts should make it easy to terminate the relationship. The initial con-
tract should take into account which firm will become the outright owner of the joint venture
activity and formulate the terms under which one company can buy out the other. The control
and ultimate decision makers should be specified in advance. The activities and information
flows in the joint venture should be tied into normal communication structures.
Criteria for evaluation of performance should be part of the contractual relationship.
Because of the inherent uncertainties of the future alternative outcomes, scenarios should be
visualized as a basis for allocation of rewards and responsibilities under different types of out-
comes. Finally, it is in the international area particularly that the knowledge acquisition poten-
tia! of joint ventures can be substantial. However, contractual differences might also put these
potentials at considerable risk of failure of realization.
A study of 88 international joint venture announcements found statistically significant pos-

itive portfolio excess returns (Chen, Hu, and Shieh, 1991) when U.S. firms invested relatively
small q.mounts in joint ventures that gained significantly positive excess returns. When firms
made relatively large investments in the joint ventures, the positive excess returns were no
longer significant.
An in-depth,book-length study ofjoint ventures in the steel industry documents the diverse
motives and effects (Mangum, Kim, and Tallman, 1996). These authors placed the steel industry
in the setting of an industrial staircase that moves from the agrarian age to an industrial age and
finally to the present information age. The steel industry is put in the setting of a basic interme-
dia te product with a capital resource emphasis. Summary data are provided on the investments
by 17 foreign steel-makers in U.S. joint ventures. The foreign partners are mainly from Japan.
In-depth case studies of seven joint ventures in steel are presented. The initial motive was the
availability of foreign capital for modernizing the U. S. steel industry. Another important objec-
tive was to transfer the superior process technologies of the Asian partners to American plants.
Cross-cultural differences added to the tensions usually found in joint ventures. Nevertheless
Mangum et al. judge the joint ventures to be generally successful. The only joint venture that
experienced great difficulties was the combination between NKK of Japan and the National
Steel Corporation of the United States. NKK was Japan's second-largest steel producer but
accounted for only 15% of Japan's total output of finished steel, compared with 72% for
number-one Nippon Steel. National Steel had been formed in 1929 and was number seven in
the United States. In the fall of 1983, it reorganized itself as National Intergroup Incorporated
(NII), announcing that it would withdraw from the steel business and diversify into pharmaceu-
ticals, aluminum, financial services, and computer services. Early in 1984, NII sold its Weirton
works to its employees under an ESOP. It offered the remainder of its steelmaking facilities to
USX. However, thé Department of Justice btocked the sale on antitrust grounds.
Among the alternatives, the joint venture with NKK seemed the least unpalatable. NKK
considered itself to be a world leader in steel technology but was unable to exploit its capabili-
ties fully beca use of domestic overcapacity and rising obstacles to international trade. The joint
venture with NII was viewed as the first step in its broader globalization plans. Despite consid-
erable progress, the economic downturn in the United States in 1989 and 1990 caused losses.
National Steel made a public offering of common stock as a de vice for NII to sell its ownership
to the public. NKK's ownership share moved from 50% to 75% . NII "bailed out" of the joint
venture. NKK took over ownership in an effort to restare its profitability. Net income of
$168.5 million was achieved in 1994. Mangum et al. concluded, that although the joint venture
carne asunder, National Steel survived under a new management team.
Desai, Foley, and Hines (2002) provided a comprehensive analysis of international joint
ventures by U.S. firms that reveals a marked decline in activity during the period 1982 to 1997.
In that prior surveys had documented a positive trend in international joint venture activity by
U.S. firms, and insofar as continued increased globalization would seem to lead to greater inter-
national joint venture activity, the analysis by Desai, Foley, and Hines is at first counterintuitive.
These authors provided empirical evidence that decreases in coordination costs, as proxied by
ease of communication, reduced transportation costs, and integration of worldwide financia!
and commodity markets, have actually made it relatively easier for U.S. firms to own 100% or
the majority of the foreign assets rather than to engage in joint ventures. They found that over
the sample period, 1982 to 1997, minority-owned affiliates declined from 17.9% to 10.6%,
whereas wholly owned affiliates increased from 72.3% to 80.4%.
COST OF CAPITAL IN FOREIGN ACQUISITIONS

ANO INVESTMENTS
The calculation of the appropriate cost of capital to apply to the free cash flows of a foreign
entity requires the use of the principies of international finance. Two main sets of concepts are
involved. First are the fundamental international parity or equilibrium relationships. Second
are the issues of whether the global capital markets are integrated or segmented. The first pro-
vides sorne insights for understanding the relationship between the cost of domestic debt and
the cost of debt in foreign countries. The capital market integration issues relate to measuring
the cost of equity capital in different countries.
COST OF DEBT RELATIONSHIPS
International business transactions are conducted in many different currencies. However, a U. S.

exporter selling to a foreigner generally expects to be paid in U.S. dollars. Conversely, foreign
importers buying from an American exporter might prefer to pay V1 their own currency. The
existence of the foreign exchange markets allows buyers and sellers to deal in the currencies of
their preference. The foreign exchange markets consist of individual brokers, the large interna-
tional banks, and other commercial banks that facilita te transactions o'n behalf of their cus-
tomers. Payments can be made in one currency by an importer and received in another by the
exporter.
Exchange rates can be expressed in U. S. dollars per foreign unit or in foreign currency (FC)
units per U. S. do llar. An exchange rate of $0.50 to FC 1 shows the value of one foreign currency
unit in terms of the dollar. We shall use Ea to indicate the spot rate, E¡ to indica te the forward
rate at the present time, and E 1 to indica te the actual future spot rate corresponding to Ef' An
exchange rate of FC 2 to $1 shows the value of the dollar in terms of the number foreign cur-
rency units it will purchase. We will use the symbol X with corresponding subscripts to refer to
the exchange rate expressed as the number of foreign currency units per do llar. We follow these
conventions in developing four fundamental equilibrium relationships of international finan ce.
The model of international parity relationships is based on the assumptions required for
perfect markets: Financia! markets are perfect; goods markets are perfect; the future is known
with certainty; the markets are in equilibrium. We can then establish the following equilibrium
relationships.
l. The interest rate parity theorem (IRPT)

2. The forward parity theorem (FPT)
3. The purchasing power parity theorem (PPPT)
4. The international Fisher relation (IFR)
The lnterest Rate Parity Theorem (IRPT)

The interest rate parity theorem holds that the ratio of the forward and spot exchange rates will
equal the ratio of foreign and domestic nominal interest rates. The formal statement of the
IRPT may be expressed as follows:
X¡ 1+R¡a Ea
-= =-
Xa 1+ Rdo E¡
4 70 PART V + M&A Strategies
Where:
x1 =current forward exchange rate expressed as FC units per $1 =$11.24
E¡ =current forward exchange rate expressed as dollars per FC unit =$0.089
X 0 =current spot exchange rate expressed as FC units per $1 = $10.31
E0 = current spot exchange rate expressed as dollars per FC unit = $0.097
R10 = current foreign interest rate = ?
Rdo =current domestic interest rate =0.05
We now illustrate a practica! way of developing numerical examples. We begin by looking

at the foreign exchange rates and current future prices in the Financia! Times. Suppose we find
that the spot price for the Mexican peso is $0.097 in dollars, which is 10.31 pesos per dallar. The
1-year futures value of the peso is $0.089; in pesos per dallar, this is 11.24. Therefore, it takes
more pesos to buy a dallar in the futures market than in the spot market. We use a U.S. prime
rate of 5% as an indication of the borrowing cost to a prime business customer in the United
States. These are the values shown in the foregoing list explanation of symbols.
We now apply the interest rate parity theorem to obtain the current foreign interest rate.
11.24/10.31 = x/1.05
Solving for x, we obtain 1.144, or a Mexican interest rate to a prime borrower in Mexico of
14.4%. We next set forth the forward parity theorem.
The Forward Parity Theorem (FPn
Under the perfect and efficient market assumptions postulated, spot futures or forward exchange
rates should be unbias~d predictors of future sp?t rates. Hence, x1 should ~qual X 1, or the future
spot rate (X1) should equal the current forward rate. In our numerical example, the future spot rate
should be 11.24 pesos to the do llar. We can now make use of the purchasing power parity theorem.
The Purchasing Power Parity Theorem (PPPn
The purchasing power parity theorem is an expression of the law of one price: In competitive
markets, the exchange-adjusted prices of identical tradable goods and financia! assets must be
equal worldwide (taking into account information and transactions costs). PPPT deals with the
rates at which domestic goods are exchanged for foreign goods. Thus, if X dollars will buy a
bushel of wheat in the United States, the X dollars also should bu y a bushel of wheat in Mexico.
In formal terms, the PPPT can be stated as:
Where:
T1=1 + foreign country inflation rate =?

Td= 1 + domestic inflation rate = 1.015
Using the data we have developed to this point, we have:
11.24/10.31 =x/1.015
We can now calculate Mexico's expected inflation rate based on the parity relationships by
solving for the unknown in the foregoing equation, which is 10.6% per annum. We now can
illustrate the international Fisher relation.
The lnternational Fisher Relation (IFR)

The Fisher relation states that nominal interest rates reflect the anticipated rate of inflation.
The Fisher relation can be stated in a number of forms. We shall use:
l+Rn=(1+r)(T)
Where:
T = 1 + rate of inflation
r =real rate of interest
Rn =nominal rate of interest
For Mexico, we have 1.144 = (1 + r)(l.l06) , so r = 0.034; for the United States, we have
1.05 = (1 + r)(l.015), so again r = 0.034. The real rates are the same, but the nominal rates differ
by the inflation factor.
We now can summarize what the four parity relationships tell us. Interest rate parity states
that current interest rate relationships will be consistent with a country 's ratio of forward
exchange rates to current spot rates. The forward parity condition says that the current forward
rate is a good predictor of the expected future spot rate. Purchasing power parity states that the
ratios of inflation rates will be consistent with the ratio of the future spot rate to the current
spot rate. Finally, the Fisher relationship states that if the other parity conditions hold, real rates
of interest will be the same across countries and nominal interest rates will reflect different
inflation rates.
Many real-world frictions can cause departures from parity conditions in the short run.
However these are the relationships toward which international financia! markets are always
moving. Experience and empirical evidence teach us that these parity conditions provide a use-
fui guide for business executives. For individual managers to believe that they can outguess the
international financia! markets,· which reflect the judgments of many players, is hubris in the
extreme. They put their companies at the peril of severe losses.
Standard textbooks in finance describe how the use of futures markets can be used to
hedge foreign exchange risks. In addition, many strategies can be used in conjunction with the
futures markets. These include borrowing in foreign markets for foreign projects, conducting
manufacturing operations in multiple countries as a buffer for inflation and foreign exchange
rate movements, and making sales in multiple countries to offset strong and weak currency
buyers, among others. Details on such strategies are beyond the scope of this book. Our objec-
tive is to estímate the applicable cost of capital for foreign acquisitions or investments. Our
discussion of the parity relationships provides a basis for understanding the applicable cost of
capital for foreign acquisitions or investments.
COST OF EQUITY ANO COST OF CAPITAL
We begin with the basic idea behind the capital asset pricing model (CAPM), which is widely
used to calculate the cost of equity and the cost of capital. CAPM states that the cost of equity
is the risk-free return plus a risk adjustment that is the product of the return on the market as a
whole multiplied by the risk measure of the individual firm or project. How the market is
defined depends on whether the global capital market is integrated or segmented. If integrated,
investments are made globally and systematic risk is measured relative to a world market
index. If capital markets are segmented, investments are predominantly made in a particular
4 72 PART V + M&A Strategies
segment or country and systematic risk is measured relative to a domestic index. With the rise
of large financia! institutions investing worldwide and mutual funds that facilita te international
or foreign investments, the world is moving toward a globally integrated capital market. We are
not there yet because of the home-bias phenomenon: Investors place only a relatively small
part of their funds abroad. For recent data, see Hulbert (2000). The reasons are not fully under-
stood. One possibility is there may be extra costs of obtaining and digesting information.
Another possibility is the greater uncertainty associated with placing investments under the
jurisdiction of another country whose authorities might change the rules of the game. If capital
markets are not fully integrated, there are gains from international diversification. A multina-
tional corporation (MNC) would apply to a foreign investment a lower cost of capital than a
local (foreign) company would (see Chan, Karolyi, and Stulz, 1992; Stulz 1995a, 1995b; Stulz
and Wasserfallen, 1995; and Godfrey and Espinosa, 1996).
Let us continue with the Mexico example. A firm domiciled in Mexico will have a beta
based on market returns for investments in Mexico. An MNC domiciled outside Mexico will
have cost of equity capital related to its beta measured with respect to the markets in which it
opera tes. A world market index might be a reasonable approximation, but measurement prob-
lems and availability would be formidable. The examples we used in Chapters 9 and 10 on
valuation were firms like Exxon and Mobil, which participate in global oil markets. Their betas,
calculated by Value Line and others, are based on the U.S. market, so the betas used for MNCs
already reflect the benefits of their foreign activities. Because a part of their cash flow patterns
reflects foreign market conditions, their total cash flow patterns in relation to the U.S. market
are likely to ha ve a smaller covariance or beta. Thus, the betas we used in Chapters 9 and 10 for
the Exxon-Mobil example were lower than if the firms had only domestic U.S. operations. The
cost of equity capital used for Exxon was 11.55%, and for Mobil it was 10.85%. These are rela-
- tively low costs expressed in U.S. dollars.
If we calculated the cost of equity for an investment in Mexico in nominal peso terms, it neces-
sarily would reflect a risk differential above the cost of debt borrowing in Mexico. If the cost of debt
borrowing in Mexico is about 14.4% based on our prior analysis, then the cost of equity is likely to
be 4 to 7 percentage points higher. Assuming a leverage ratio of debt to equity at market of 40%, a
cost of equity of20%, anda tax rate of 40%, we can calculate the weighted costs as follows:
WACC = (0.144)(0.6)(0.4) + (0.20)(0.6) =0.155
We could use this discount factor of 15.5% in calculating the present value of an investment in
Mexico. The cash flows expressed in pesos discounted by the peso cost of capital would give us
a present value expressed in pesos. This present value converted to dollars at the spot rate
should give us the net present value of the investment in dollars.
Table 17.9 displays the calculation of the present value in pesos of an investment in Mexico.
The project yields cash flows over a 5 year period, at the end of which it hopefully can be sold
to a local buyer for 10,000 pesos. L1ne 1 of Table 17.9 represents the preliminary estima tes of
cash flows from the project expressed in pesos. In Line 2, we recognize that these projections
are subject to error. We are particularly concerned that the foreign country might change the
rules of the game. For example, political instability might bring a government with an anti-
foreign business philosophy into power, discriminatory taxes might be imposed, restrictions on
repatriation of funds might be enacted, or militant unions might raise wage costs, reducing net
cash flows. We believe it is better to recognize these risk adjustments in the cash flows explicitly
TABLE 17.9 Calculation of Present Value in Pesos

Year
o 1 2 3 4 S S
1 Cash flow in pesos 1,000 1,100 1,200 1,400 1,600 10,000
2 Probability (risk) factors 0.9 0.9 0.8 0.8 0.6 0.5
3 Expected cash flows in pesos 900 990 960 1,120 960 5,000
4 Discount factor (pesos) 1.155 1.133 1.539 1.777 2.052 2.052
5 Discounted peso cash flows 779.46 742.56 623.62 630.11 467.75 2436.21
6 Present val ue (pesos) 5,679.71
rather than fudge the discount factor. The discount factor should reflect systematic risk and not
the idiosyncratic factors described.
Therefore, Line 3 of Table 17.9 represents the risk-adjusted expected peso cash flows. In
Line 4, we apply the discount factor of 15.5%, which reflects the pesd cost of capital for the proj-
ect. Line 5 presents the discounted peso cash flows using the data in Lines 3 and 4. In Line 6, the
present values from Line 5 are summed to obtain the total prese.nt value of the project of
5,679.7 pesos. The U. S. firm could incur investment outlays with a presént value of up to 5,679.7
pesos to earn its cost of capital. We convert the present value of 5,679 in pesos to dollars at the
spot rate of 10.31 to obtain a present value of $550.90.
We should get the same result by beginning with the cash flows in pesos, converting them to
dollars over time, and discounting them by the WACC of the U.S. firm. In Table 17.10, we will
illustrate this second method as well, using the same cash flows in pesos. Again, the project
yields cash flows over a 5 year period, at the end of which it hopefully can be sold to a local
buyer for 10,000 pesos.
Lines 1 through 3 in Table 17.10 are identical to Lines 1 through 3 in Table 17.9. Line 1
displays the cash flows without adjustments, Line 2 provides the adjustment factor, and Line 3
displays the risk-adjusted cash flows in pesos. Line 4 provides the expected future exchange
TABLE 17.10 Calculation of Present Value in Dollars

Year
o 1 2 3 4 S S
1 Cash flows in pesos i,ooo 1,100 1,200 1,400 1,600 10,000
2 Probability (risk) factors 0.9 0.9 0.8 0.8 0.6 0.5
3 Expected cash flows in pesos 900 990 960 1,120 960 5,000
4 Exchange rate in year t 11.236 12.246 13.347 14.546 15.854 15.584
5 Expected dollar cash flows 80.10 80.84 71 .93 77.00 60.55 315.38
6 Discount factor (dollars) 1.059 1.122 1.189 1.260 1.335 1.335
7 Discounted dollar cash flows 75.61 72.03 60.49 61.12 45.37 236.31
8 Present value in dollars 550.93
rate by which to convert pesos to dollars. We start with the spot rate of 10.31 pesos per dallar.
From interest rate parity, for each subsequent year we multiply the 10.31 times (1.106/1.015)l,
the relative inflation rates. For example, the forecasted exchange rate in year 5 is equal to
15.85. In Line 5, the exchange rates are applied to the expected peso cash flows of Line 3 to
give us the expected cash flows expressed in dollars.
In Line 6, we apply a U.S. WACC of 5.9%. To obtain this dallar discount factor, we multi-
plied 1.155 (1 plus the discount rate in pesos) times the relative inflation rates (1.015/1.106).
Line 7 presents the discounted cash flows in dollars using the data in Lines 5 and 6. In Line 8,
the present values from Line 7 are summed to obtain the total present value of the project of
$550.93. Note that is identical to the first method in which we computed the present value of
the project in pesos and then converted to dollars at the current spot rate.
We have illustrated a systematic methodology for valuing foreign acquisitions or making
direct investments. The numbers used in the example were simplified to facilitate the exposi-
tion. The underlying principies and concepts would be the same if we were using a complex,
sophisticated computer program. The method is similar to the valuation of domestic invest-
ments. The complications are mainly foreign exchange risks and foreign country risks. The par-
ity relationships provide useful guidelines for thinking about foreign exchange rates, relative
inflation, and relative interest rates. In Table 17.10, we do not mean to imply that the risk fac-
tors applied in Line 2 are to be approached passively. A company can use a wide range of
strategies to minimize the unfavorable possibilities. A sound project or the purchase of a for-
eign firm can contribute to increased employment, productivity, and output in the foreign
county. The technological and management practices the parent brings to the subsidiary can
make its continued participation indispensable. Also, the foreign operation can be so organized
that it could not function without the unique parts provided by the paren t. Another possibility
is that the investment is part of an international agency program to develop the infrastructure
of the host country. Arbitrary changes in the rules of the game could injure the reputation and
reduce future international support of a self-serving government.
As we noted at the beginning of this chapter, the number and magnitude of cross-border
mergers are growing faster than those of U.S. mergers. Cross-border mergers involve interna-
tional factors that need to be taken into account. Our aim has been to improve decision making
in the area of international transactions.
Summary
International mergers are subject to many of the same influences and motivations as domes-
tic mergers. However, they also present unique threats and opportunities. The issue of merg-
ers versus other means of achieving international business goals (such as import/export,
licensing, joint ventures) builds on the fundamental issue in the theory of the firm: whether to
transact across markets or to internalize transactions using managerial coordination within
the firm.
When firms choose to merge internationally, it implies that they have concluded that this
will result in lower costs or higher productivity than alternative contractual means of achieving
international goals. In horizontal mergers, intangible assets play an important role in domestic
and international combinations. The exploitation of an intangible asset such as knowledge may
require merger be cause of the "public good" nature of the asset. Attempts to exploit intangibles
short of merger require complex contracting, which is not only expensive but likely to be
incomplete (especially when compounded by the problems of dealing with a foreign environ-
ment), possibly leading to dissipation of the owner's proprietary interest in the asset. Sirnilarly,
vertically integrated firms exist to internalize markets for intermedia te products on the domes-
tic and internationallevels.
Among the special factors impacting international mergers more than domestic mergers
are tariff barriers and exchange rate relationships. Operating within a tariff barrier might be the
only means of obtaining competitive access to a large market, for example, the European
Common Market. Exchange rates are also an important influence. A strong dallar makes U. S.
products more expensive abroad but reduces the cost of acquiring foreign firms. The reverse
holds when the dallar is weak, encouraging U.S. exports and foreign acquisitions of U.S. compa-
nies, all other factors held constant.
Although the risks of operating in a foreign environment are greater, they can be reduced
through careful planning or by an incremental approach to entering the foreign market.
Furthermore, to the extent that the foreign economy is imperfectly correlated with the domes-
tic economy, the systematic risk to the company as a whole may be reduced by international
diversification. ;
The increasing globalization of competition in product markets is extending rapidly into
internationalization of the takeover market. The best method by wbich to achieve a firm's
expansion goals may no longer be the takeover of a domestic firin but of a foreign one.
International M&A activity has grown substantially over the past 20 years, and it is likely to
continue to increase into the future.
Questions
17.1 Why is M&A activity in Europe in recent years growing ata more rapid rate than in the United
States?
17.2 Why is M&A activity increasing in Japan in recent years?
17.3 Why is M&A activity increasing in the People's Republic of China in recent years?
17.4 Why is M&A activity increasing in other Asian are as, such as Taiwan, Korea, and Malaysia?
17.5 Describe the two most important reasons behind each of the cross-border transactions discussed in
the brief examples in the text?
17.6 What has been driving the big pharmaceutical mergers in recent years?
17.7 Are there any forces driving cross-border mergers that operate more strongly than the reasons for
transactions that take place within a given country's border?
17.8 How would you explain why foreign bidders pay higher premiums for U.S. targets than U.S. domestic
bidders pay for U.S. targets?.
17.9 Suppose you go to the Web page of the Central Bank of Mexico and find that the inflation rate in
Mexico during the last 5 years has been 10% per annum. You check a number of other research
sources and find that this inflation rate is expected to continue for the next 5 years?
a. With a current spot rate of 10.0 Mexican pesos to the U.S. dollar and an expected inflation rate
in the U. S. for the next 5 years of 2%, use PPPT to calcula te the expected future spot rate in
1 year.
b. The forward parity theorem holds so that the spot futures or forward exchange rate is equal to
the expected future spot rate. Use IRPT to calculate the current interest rate in Mexico when
the comparable U.S. interest rate is 5%.
Case 17.1 THE SAGA OF GERBER

PRODUCTS
The case study of Gerber Products is a more detailed quate disclosure of its financing arrangements in its
analysis of the role of international markets in the tender offer filing. Michigan's antitakeover law
growth of food companies. For years, Gerber saw the includes a requirement for a 60-day waiting period
necessity of expanding abroad. Somehow though, after a tender offer. Gerber Products used this time to
Gerber was unable to implement its goals of expand- seek out an acceptable white knight. Gerber began
ing internationally. The M&A market accomplished discussions with Unilever as a possible alternative
what Gerber was unable to do on its own. purchaser. Anderson Clayton secured a financing
agreement from several New York banks to establish
GERBER REBUFFS ANDERSON compliance with this requirement under Michigan's
CLAYTON antitakeover law.
At its July 1977 annual meeting, Gerber reported
In 1977, Gerber Products was approached by
that second quarter earnings had dropped by one
Anderson Clayton Company. Anderson Clayton
third. Anderson Clayton indicated that Gerber was
wanted to continue to expand its diversified opera-
deliberately understating its earnings and lowered its
tions, which already included processing soy beans,
offer from $40 to $37.
coffee, and a life insurance company. Anderson
In the meantime, the Michigan courts issued a
Clayton's overtures were rebuffed by Gerber
series of rulings, all favorable to Gerber. A trial on the
Products. Nevertheless, Anderson Clayton made a
securities charges was scheduled for September 1977.
tender offer for Gerber Products at $40 a share.
After this tria!, there would be another in which the
Gerber management mounted a"strong defense.
antitrusf charges would be litigated. Faced with uncer-
Gerber Products filed suit against Anderson Clayton
tain and expensive litigation and the possibility that
in a federal court in Grand Rapids, Michigan, rela-
over the extended period of time, other bidders might
tively near the Gerber headquarters in Fremont,
force higher bids, Anderson Clayton withdrew its
Michigan. Gerber charged that the acquisition by
offer. In response to this announcement, the stock
Anderson Clayton would represent a serious antitrust
price of Gerber fell from $34.375 to $28.25.
conflict. It charged that potential competition
between the companies in the future would be stifled
by the merger. Gerber argued that Anderson Clayton GERBER'S STRATEGIC PROBLEMS
could develop a baby products business in the future. In the following years, Gerber sought to reduce its
Gerber also stated that it had been considering vulnerability to a takeover. Gerber attempted to
entrance into the salad oil market, in which Anderson diversity into other areas such as children's apparel,
Clayton already was doing business. Gerber's lawsuit furniture, farming, day care centers, trucking, humidi-
also charged that in its tender offer, Anderson fiers, and life insurance. None of these appeared
Clayton did not make adequate disclosure of $2.1 mil- to have any real synergy with Gerber's baby food
lion in questionable payments it had made overseas. business.
This charge obviously sought to embarrass Anderson Although Gerber held 70% of the U.S. baby food
Clayton by the adverse publicity that would be gener- market, it was relatively weak abroad. Higher growth
ated by raising this issue. In addition, Gerber com- for Gerber would have meant increasing in sales in
plained that Anderson Clayton had not made ade- countries outside the United States, which annually
account for 98% of births worldwide. Over the years, It was pointed out that the Sandoz bid would not
Gerber made sorne efforts to expand its overseas include any form of stock option lockup. This fol-
operations but hesitated to commit the funds that lowed from the court decision in the QVC takeover
would have had a near-term negative impact on its of Paramount. Paramount had granted Viacom, its
profitability rates. Because it was an inexpensive way preferred buyer, the right to buy 24 million
to go, Gerber often would license overseas manufac- Paramount shares for $69.14. When Paramount went
tures to make and distribute its baby food. Licensing to $80 a share, the option was worth $500 million to
has at least two drawbacks. First, the fees that can be Viacom. Nevertheless, the Sandoz agreement
charged for licensing are relatively small. Second, the involved a breakup fee. In a breakup fee arrange-
licensee develops the critica! capability and can ment, the original bidder receives a fee if it does not
always play one product against another. Sometimes succeed in the takeover. Gerber agreed to pay
the licensing arrangements carne to an end because $70 million to Sandoz if the Sandoz bid did not succeed.
the foreign manufacturer decided to shift to other Sorne writers argued that differences in tax laws
products. As a consequence, increasingly Gerber was made the acquisition more attractive to Sandoz than
supplying Asia and the Middle East from its U.S. to a U.S. buyer (Sloan, 1994). The tangible net worth
plants. of Gerber was about $300 million. For a U.S. buyer,
the difference between the $3.7 billion paid and the
$300 million tangible net w9rth of Gerber would have
THE AUCTION OF GERBER
represented goodwill. A U.S. company would have
As a consequence of its weak performance abroad, had to charge its after-tax p~ofits, $85 million per year
Gerber's revenues stayed flat at about $1.2 billion for 40 years, which was 75% ofthe $114 million net
from 1990 through 1994 (Gibson, 1994). Its net income of Gerber in its 1994 fiscal year. Sandoz, on
income for the years 1990 through 1994 averaged less the other hand, could charge the goodwill against its
than $100 million. Gerber had stock splits in 1982, own net worth without affecting annual earnings. It
1984, 1989, and 1992. However, adjusted for all splits, was stated that the $114 million net income would
the Gerber stock stayed relatively flat in the range of represent a 38% return on the $300 million tangible
$30 per share. Gerber realized it needed to go abroad assets Sandoz would add to its balance sheet (Sloan,
but was reluctant to commit the resources that would 1994). In addition, there was also a possibility of a tax
have a negative impact on earnings. In early 1994, write-off by Sandoz in connection with the goodwill
Gerber requested Goldman Sachs to explore a pos- purchase and write-off.
sible friendly buyout that would help Gerber become
stronger in the overseas markets. Essentially, an auc-
tion was conducted. The winner was Sandoz AG, a QUESTIONS
Swiss company that bid $53 a share on May 23, 1994.
C17.1.1 Why was Gerber interested in expanding in
When takeover speculation started, the price of
international markets?
Gerber shares moved up by 33% between early
C17.1.2 Why was Gerber unable to succeed on its
February 1994 and the period just before the Sandoz
own in developing international markets?
offer. After the Sandoz offer, Gerber shares increased
C17.1.3 Why did Gerber reject the earlier efforts by
another $15.50 to $50.125. The $53 price was high
Anderson Clayton to acquire it?
because it represented 30 times current earnings, 20
C17.1.4 Why did Gerber request its investment
times after-tax cash flow, and 3 times sales.
banker to find a buyer that could develop its
For Sandoz, the acquisition would expand its
potential in international markets?
position in the food business and in nutritional prod-
Cl7.1.5 Why was Sandoz interested in Gerber?
uct sales. Sandoz airead y had a strong position in food
sales in Europe and Asia, but only 14% of its food
=-- sales carne from North America.
Case 17.2 CIBA-GEIGY MERGER WITH

SANDOZ 1
In Basel, Switzerland, on March 7, 1996, Ciba-Geigy attendance with 70% of share capital with voting
and Sandoz issued a joint statement by the chairmen privileges. The CEO of Ciba, Dr. Alex Krauer, told
of both companies that they would merge into one shareholders that the merger "will not only improve
company with the new name Novartis (Olmos, 1996). shareholder value, but also open a promising future
The company would focus on its core businesses, for the majority of our employees." The merger was
which are pharmaceuticals, agribusiness, and nutri- approved by 98.7% of the members present and
tion. Each company would divest its divisions that 69.4% of the share capital. The Sandoz shareholders
did not relate to the core life sciences focus of the approved the merger on April 24, 1996. The next
new company, Novartis. This included Ciba's divi- phase of merger approval involved regulatory agen-
sion of specialty chemicals (Tanouye, Lipin, and cies of the European Union and to a lesser extent
Moore, 1996). those of the United States.
Ciba was well known for its New Vues disposable Shareholders of Ciba stock received 1.067 shares
contact lens, Habitrol nicotine patches, Ritalin for of Novartis, and shareholders of Sandoz stock
hyperactive children, Sunkist vitamins, Maalox, received 1 share of Novartis for each share they cur-
Zantac, and Efidac, an over-the-counter cold medi- rently held. Sandoz shareholders held 55% of the new
cine. Sandoz was known for its nutrition division, company, whereas Ciba shareholders held 45% of
which included Gerber baby foods, Ovaltine, and Novartis.
Wasa crispbreads. The merger took many analysts by surprise, but
The new name Novartis was partly due to the most agreed that it was an excellent strategic move
· strategy that the merger wás between two equals that beca use it was a proactive·reaction to the general con- ·
wanted to become innovators for the next century solidation of the industry. The bankers who negoti-
(Guyon, 1996). The new name was developed by ated the deal also were praised because it was struc-
London's Siega! and Gale consultants, who were hired tured as a share swap instead of an outright purchase.
to create a powerful new marketing strategy for the This caused the deal to be virtually taxfree, and there
company. The word derives from the Latín novo, which was also no write-down of "goodwill." Goodwill com-
means "new," and artis, which means "skill." The new pensates for the difference between sale price and the
name had to be tested in 180 countries to make sure book value of assets but can be a negative force
that it did not ha ve any negative connotations. because it reduces reported profits.
Ciba-Geigy was the world's 9th-largest drug- The news of the merger sent stock prices of the
maker, and Sandoz was the 14th. The merger created large pharmaceutical companies soaring. lt also
a new company that was to be the world's number- affected smaller companies that were seen as pos-
one supplier in agricultura! chemicals, a world leader sible takeover targets for the large companies looking
in biotechnology, and a large presence in the nutrition to compete with the new Novartis. Both companies
products field. The new firm would still have only were traded on the Swiss stock market, and reaction
4.4% of the global mar ket. The new company would to the news was positive for both companies; Sandoz
have the third-largest pharmaceuticals revenue, with shares rose 20% and Ciba's 30%. This also can be
drug sales at $10.94 billion (1995 revenue). attributed to the intended cut of 10% of the work-
On April 24, 1996, in Basel, Switzerland, the force of the newly created company. The new com-
merger was put to a vote at the final Ciba annual gen- pany was to have an estimated total market value of
eral meeting. The meeting counted 6,896 people in $60 billion.
1Written by Erica Clark and J. F. Weston .

CHAPTER 17 • lnternational Takeovers and Restructuring 479
STRATEGIC REASONS FOR squeezed profits and forced industry restructuring.

THE CIBA-SANDOZ MERGER Through mergers, firms ha ve sought to economize on
The consolidation of these two large companies research costs, combine product lines, and increase
reflected a growing trend in the fiercely competitive marketing effectiveness.The Glaxo-Wellcome merger
pharmaceuticals industry (Kraul, 1996). This was in 1995 produced a company with almost $12 billion
partly attributable to the high cost of research and in 1995 pharmaceutical revenues, making it number
development that is specific to the industry. An esti- one worldwide. Glaxo planned to reduce costs by
mated $80 billion in mergers ha ve occurred since 1993 closing plants and reducing employment by 7,500 out
in the pharmaceutical industry. However, the top 20 of a workforce of 62,000.
companies still make up only 50% of total sales
worldwide (Economist, 1994). BACKGROUND ON COMPANIES
Both companies were facing the fundamental Ciba-Geigy and Sandoz share a long corporate rela-
challenges that most drug companies are encounter- tionship dating back to Base! in the 1850s. The Ciba
ing in the current, highly competitive market. The company merged with the Geigy company in 1970.
challenge was to develop a continuing supply of sig- The Geigy company was founded in 1758 by Johann
nificant new drugs. This constant push for innovation Geigy, who traded organic compounds such as spices
based on the research and development of new prod- and natural dyes. It had grown into a large company
ucts causes the pharmaceutical business to be inher- by the 1900s. Another Basrl citizen started a synthetic
ently risky, because research and development is dye trade around the turn of the century called
extremely costly but does not guarantee a constant Gesellschaft für Chemisch~ industrie im Basle, which
stream of new products. In addition, the creation of was later shortened to CIBA. Sandoz was founded in
new products is heavily dependent on the approval of 1886 in Base! as Kern & Sándoz.
regulatory agencies such as the U.S. Food and Drug In the 1970s, Ciba-Geigy had severa! public set-
Administration (FDA). Of every 10 drugs that pass backs, including the discovery of the way the company
the initial investigation stage, only 1 ultimately will had tested the chemical Galecron. In 1976, they paid six
receive approval of the FDA. Of the few products that Egyptian boys to stand in a field and ha ve the chemical
ultimately do gain regulatory approval, only a fraction sprayed on them. The result was public outrage, and the
generate sufficient sales to earn the cost of capital for company was forced to improve its tarnished image.
a drug company, even a modest 10% to 12%. Then in 1978, more than 1,000 deaths in Japan were
Another major challenge facing these companies linked to a Ciba-Geigy diarrhea medication.
is that the pharmaceutical industry seems to produce In the 1980s, Ciba-Geigy decided to focus its
important scientific breakthroughs in cycles. There operations on specialty chemicals and the health care
are periods of great productivity and periods when products field. In 1988, Ciba sold its Ilford Group, a
the foundations for new research are in the develop- photographic products division, to International
ment state. This causes incredible pressure on the Paper. Subsequently, Ciba formed alliances with high-
pharmaceutical companies to produce, even when technology companies, including a joint venture with
their research is in the slow development phase. This a Carlsbad, California, company, Isis Pharmaceuticals,
particular issue was of great concern to Ciba and and with Affymax of Palo Alto, California, to study
Sandoz. The companies viewed the merger as a way to computer-aided screening of its products.
create a more powerful research arsenal, which would Sandoz spent the post-World War II era concen-
help them into the important new research frontiers trating on product development based on interna!
of the new century, such as biotechnology. Sandoz had research and development. In the 1950s and 1960s,
invested heavily in gene research, but newly devel- Sandoz expanded its production units across Europe
oped products were still years away (Taber, 1996). and into Japan. In 1967, Sandoz acquired Dr. Wander
The highly aggressive nature of the current A.G., which gave Sandoz a consumer products pres-
industry trend of merge or be an acquisition target ence and strengthened its international holdings. In
caused Ciba and Sandoz to make a decisive move 1976, it continued to diversify its product scope by
toward consolidation. The merger can be attributed to acquiring Northrup King & Corporation, one of the
the rapid pace of other mergers that have taken place largest U.S. seed companies.
in the industry. Cost-containment efforts by govern- Crucial moves occurred in 1980 and 1981 with the
ments and managed health care organizations have acquisitions of a French dye company, SA Cardoner, a
U.S. seed company, McNair, anda U.S. pharmaceutical Pharma, Sandoz Agro, Sandoz Seeds, Sandoz
company, Ex-Lax. In the mid-1980s, Sandoz enjoyed Nutrition, and MBT Holdings... e ,
strong cash flows and was able to continue to
strengthen itself with new investments and acquisi-
QUESTIONS
tions, including Sodyeco, a division of Martin Marietta,
and Zoecon Corporation from Occidental Petroleum. C17.2.1 What were the individual strengths and
In 1989, Sandoz had to reorganize dueto harsher weaknesses of Sandoz and Ciba-Geigy?
worldwide trading conditions. In 1990, a new structure C17.2.2 How would the merger help each company?
was formed in which Sandoz Limited, holds 100% of C17.2.3 What was the expected future strategic
six operating companies: Sandoz Chemicals, Sandoz focus of Novartis, and why?
Case 17.3 VODAFONE AIRTOUCH

TAKEOVER OF MANNESMANN2
Due to increased liberalization and a relaxation in tions company in the world. The acquisition made
regulatory regimes in many countries, the late-1990s Vodafone and Mannesmann partners in multiple
witnessed a merger manía in the telecommunications European wireless markets with ventures covering
industry. Companies in this sector moved to reposi- 95% of the European Union. Later, in October 1999,
tion themselves for an increasingly competitive land- Mannesmann broke what had been seen by many
s~ape and sought to redefip.e themselves through _analysts in the market as a gentleman's agreement by
increased size and market diversity. winning a $34.2 billion bid on Orange PLC, a com-
On November 13, 1999, the world 's largest petitor of Vodafone in the United Kingdom. The
mobile phone group, Vodafone AirTouch, announced move was a surprise because Mannesmann, only a
a takeover bid for the German engineering and month before its bid on Orange, pulled out of a much
telecommunications group, Mannesmann AG. The smaller bid on UK telecom One20ne bought by
UK-based telecom, Vodafone, had approached Deutsche Telekom AG for $13.4 billion. Mannes-
Mannesmann with an uninvited offer that was mann's purchase of Orange sent Vodafone into the
rejected immediately by Mannesmann's executive number three position in Europe. By entering the
board. Management and the supervisory board competitive field in their own backyard, Vodafone
expressed that the offer was not only inadequate, but believed that Mannesmann created an adversaria!
strategically unsound due to their different infrastruc- situation where joint ventures with Mannesmann
tures and growth prospects. A week later, Vodafone would suffer because the companies would be com-
presented an improved proposal, appealing directly peting directly in each others' markets. As a result,
to shareholders to exchange their shares in the ratio Vodafone began its bid to take over Mannesmann.
of 53.7 Vodafone AirTouch shares for 1 Mannesmann
share. When Mannesmann's executive board contin-
ued to fight the merger attempt, the Vodafone offer POLITICAL DEBATES
became the world's largest hostile bid in history. SURROUNDING THE VODAFONE-
The timing of Vodafone's bid for Mannesmann MANNESMANN MERGER
was dueto a confluence of events. In January of 1999, No foreign group had ever succeeded in taking over a
Vodafone acquired AirTouch in a $66 billion German company against the wishes of the target
cash/stock deal, making it the largest telecommunica- management. German corporate bylaws are written
2Written by Lynda Pires.

to discourage predatory behavior. After public COMPLETION OF "FRIENDLY"

announcement of Vodafone 's takeover plans, the TAKEOVER
response by Germany's left was almost immediate. By On February 3, 2000, after 3 months of public opposi-
the end of November, German workers' unions had tion, Mannesmann reached an agreement with
organized against the hostile bid and implored share- Vodafone whereby shareholders would receive a
holders to reject the bid. In an unexpected event, 49.5% share in Vodafone. This offer increased the ini-
Mannesmann workers and management received the tial 53.7 exchange ratio to 58.96 Vodafone shares for
support of the American trade unions' AFL-CIO. As every 1 Mannesmann share. The $203 billion deal con-
trade union criticism gained public momentum, solidated four of Europe 's biggest mobile compa-
German politicians entered the public debate over nies-Omnitel in Italy, SFR in France, Mannesmann
the future integrity of the German business model. At in Germany, and Vodafone in the UK-making it the
its peak, German Chancellor Gerard Schroeder fourth-largest company in the world with market cap-
accused the hostile bid of working to "destroy corpo- italization of $393 billion (f228 billion) and a cus-
rate cultures." ("Blair Counters Schroeder on tomer base of 42 million.
Telecoms Takeover Bid," Reuters News, Novem- Preliminary negotiations, which had been hostile,
ber 21, 1999). He stated that a deal of this nature continued until it appeared that Mannesmann share-
would work against German traditions of worker par- holders would be receptive to a direct tender offer.
ticipation in company management. The media By accepting Vodafone)s óffer at the 11th hour,
focused on a public fear of new German involvement Mannesmann management could formally position the
in a no-holds-barred form of "global business canni- deal as a "friendly" merger, preventing an embarrass-
balism" even though Mannesmann was already in a ing hostile takeover and situating Vodafone AirTouch
sense foreign owned with 60% of shares in the hands to gain regulatory approval in the EU and Germany
of non-Germans. with greater ease. Analysts feared that Mannesmann
The German outcry provoked an equally fervent would move to involve the German government in
reply on the part of the British press and political efforts to squelch the deal, but in late-evening negotia-
establishment. British Prime Minister Tony Blair tions between Vodafone Chairman Chris Gent and
heartily supported the Vodafone takeover, rejecting Mannesmann Director Klaus Esser the decision was
Chancellor Schroeder's claim as "exaggerated", and made to end the takeover on positive terms.
not in line with the new European market mecha-
nism. Several market-oriented members of the
German Right mirrored this sentiment by lamenting STRATEGIC REASONS FOR
that Germany would remain in a state of nationalistic VODAFONE-MANNESMANN
stagnation if it continued its political ethos of cansen- MERGER
sus building and reluctance to change and engage in The deal resulted in significant gains for both compa-
globalizing trends. The Vodafone-Mannesmann strug- nies. Their combined global assets created a company
gle appeared to underscore the tensions between the positioned to build a pan-European wireless network
Anglo-Saxon model of unfettered capitalism and the with strategies for growth in Asían, Australian, and
Rhineland model of a social market economy U.S. markets. In addition, during negotiations,
("We're Talking Telephone Numbers," The Guardian, Vodafone entered into an alliance with Vivendi,
November 23, 1999). which hinged on a Vodafone acquisition of Mannes-
The size of the transaction also encouraged pol- mann. When the Mannesmann deal was confirmed,
icy makers to draft new EU takeover provisions. The Vodafone simultaneously entered into a deal with
need for pan-EU takeover rules had been discussed Vivendi to develop a joint, multi-access, wireless
for more than a decade, but the newly highlighted Internet network with the potential for a pan-
fear over collective market dominance and oligopo- European, fixed-line network that would combine
lies moved legislation to the table. Mannesman 's and Vivendi's fixed assets. (CIO,
In the midst of complex political developments, Analysts Comer, "Mannesmann Finally Succumbs to
Mannesmann also made a sudden move to gain time Vodafone," Current Analysis, Inc., February 7, 2000,
in staving off the transaction by seeking a court www2.cio.com/analyst/report233.html). This massive
injunction in London against Vodaphone advisor merger confirmed the European trend to move
Goldman Sachs, citing "conflict of interest." e-commerce toa "internet-via-the-mobile" plan.
482 PARTV + M&A Strategies
The merger signaled an attempt by Vodafone to QUESTIONS

take an early lead in the wireless Internet market. The
Vodafone-Mannesmann-Vivendi conglomera te was C17.3.1 Why was Vodafone AirTouch interested in
acquiring Mannesmann?
positioned ro exert greater influence in procuring
C17.3.2 Why did Mannesmann reject the initial bid?
deals with suppliers and distributors. The merger not
C17.3.3 What caused Mannesmann to eventually
only represented the largest takeover in history, but
accept the takeover offer by Vodafone?
also serves to illustrate the ongoing debate and ten-
sions in increasingly globalized industrial and market
organizations.
References
Cakici, N., G. Hessel, and K. Tandon, "Foreign Eckbo, Espen, and K. S. Thorburn, "Gains to Bidder
Acquisitions in the United States: Effect on Firms Revisited: Domestic and Foreign
Shareholder Wealth of Foreign Acquiring Firms," Acquisitions in Canada,'' Journal of Financia! and
Journal of Ranking & Finance 20,1996, Quantitative Analysis 35:1, March 2000, pp. 1-25.
pp. 307-329. Eun, C. S., R. Kolodny, and C. Scheraga, "Cross-
Caves, Richard E., Multinational Enterprise and Border Acquisitions and Shareholder Wealth: Tests
Economic Analysis, Cambridge, MA: Cambridge of the Synergy and Internationalization
University Press, 1982. Hypotheses," Journal of Ranking & Finance 20,
Chan, K. C., G. A. Karolyi, and R. M. Stulz, "Global 1996,pp.l559-1582.
Financia! Markets and the Risk Premium of U. S. Froot, K., and J. Stein, "Exchange Rates and Foreign
Equity," Journal of Financia! Economics 32, 1992, Direct Investmen~. An Imperfect Capital Mar~ets
pp. 137-167. - - Approach, The Quarterly Journal of Economics
Chen, Haiyang, Michael Y. Hu, and Joseph C. P. 106,199l,pp.l191-1217.
Shieh, "The Wealth Effect of International Gibson, Richard, "Gerber Missed the Boat in Quest
Joint Ventures: The Case of U. S. Investment in to Go Global, So It Turned to Sandoz," Wall Street
China," Financia! Management 20, Winter 1991, Journal, May 24, 1994, pp. Al, A4.
pp. 31-41. Godfrey, Stephen, and Ramon Espinosa, "A Practica!
Desai, Mihir A., C. F. Foley, and J. R. Hines, Approach to Calculating Costs of Equity for
"International Joint Ventures and the Boundaries Investments in Emerging Markets," Journal of
of the Firm," Harvard Business School working Applied Corporate Finance 9, Fall1996,
paper, 2002. pp. 80-89.
Dewenter, Kathryn L. "Do Exchange Rate Changes Guyon, Janet, "What Is Novartis?" Wall Street
Drive Foreign Direct Investment?" Journal of Journal, March 11, 1996, p. Bl.
Business 68, July 1995, pp. 405-433. Harris, Robert S., and David Ravenscraft, "The Role
Doukas, J., "Overinvesting, Tobin's q and Gains from of Acquisitions in Foreign Direct Investment:
Foreign Acquisitions," Jo urna! of Ranking & Evidence from the U.S. Stock Market,"Journal of
Finance 19,1995, pp.l285-1303. Finance 46, 1991, pp. 825-844.
Doukas, John, and Nickolaos G. Travlos, "The Effect Hudgins, S. C., and B. Seifert, "Stockholder Returns
of Corporate Multinationalism on Shareholders' and International Acquisitions of Financia! Firms:
Wealth: Evidence from International An Emphasis on Banking," Journal of Financia!
Acquisitions," Journal of Finance 43, December Service Research lO, 1996, pp.l63-180.
1988,pp. 1161-1175. Hulbert, Mark, "A Planto Overcome Investors'
The Economist, "Drug Mergers: Understanding the Home Bias," New York Times , January 23,2000,
Pill Poppers," August 6, 1994, p. 53. Sec. 3, p. 9.
CHAPTER 1 7 + lnternational Takeovers and Restructuring 483
Kang, Jun-Koo, "The International Market for Sloan, Allan, "As Swiss Sandoz Scoops Up the ·
Corporate Control: Mergers and Acquisitions of Gerber Baby, Blame U. S. Accounting Law," Los
U. S. Firms by Japanese Firms," Jo urna/ of Financia! Angeles Times, June 5, 1994, p. Dl.
Economics 34, December 1993, pp. 345-371. Stulz, René M., "The Cost of Capital in
Kraul, Chris, "Pain-Relieving Compound: Ciba- Internationally Integrated Markets: The Case of
Sandoz Plan Is Part of the Bigger Survival Nestlé," European Financia! Management 1, March
Picture," Los Angeles Times , March 8, 1996, p. Dl. 1995a, pp. ll-22.
Mangum, Garth L., Sae-Young Kim, and Stephen B. - - , "Globalization of Capital Markets and the
Tallman, Transnational Marriages in the Steel Cost of Capital:The Case of Nestlé," Jo urna!
Industry ,Westport, CT: Quorum Books, 1996. ofApplied Corporate Finance 8, Fall1995b,
Markides, C., and D. Oyon, "International pp. 30-38.
Acquisitions: Do They Crea te Value for - - , and Walter Wasserfallen, "Foreign Equity
Shareholders?" European Management Journa/16 , Investment Restrictions, Capital Flight, and
1998, pp.125-135. Shareholder Wealth Maximization: Theory and
Moeller, Sara B., and Frederik P. Schlingemann, Evidence," The Review of Financia! Studies 8,
"Are Cross-Border Acquisitions Different from Winter 1995, pp.1019-1057.
Domestic Acquisitions? Evidence on Stock and Swierczek, Frederic, and Qeorges Hirsch, "Joint
Operating Performance for U.S. Acquirers," Ventures in Asia and Multicultural Management,"
University of Pittsburgh working paper, 2002. European Management Journa/12:2, June 1994,
Olmos, David, "Two Swiss Drug Firms Agree to pp.197-209. ..
Merge in $27 Billion Deal," Los Angeles Times, Taber, George, "Remaking an lndustry," Time,
March 8, 1996, p. Al. September 4, 1996.
Seth, A. , K. P. Song, and R. Pettit, "Synergy, Tanouye, Elise, Steve Lipin, and Stephen D. Moore,
Managerialism or Hubris? An Empirical "In Big Drug Merger Sandoz and Ciba-Geigy Plan
Examination of Motives for Foreign Acquisitions to Join Forces," Wall Street Journal, March 7, 1996,
of U.S. Firms," Journal of lnternational Business p. Al.
Studies, 2000. Zahra, Shaker, and Galal Elhagrasey, "Strategic
Shaughnessy, Haydn, "International Joint Ventures: Management of International Joint Ventures,"
Managing Successful Collaborations," Long Range &trapean Management Journa/12:1, March 1994,
Planning, 28, June 1995, pp.10-17. pp. 83-93.

International Takeover

Uploaded by

Copyright:

Available Formats

International Takeover

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

International Takeover

Uploaded by

Copyright:

Available Formats

Weston, J., Mitchell, M., Mulherin, J. (2004). International takeovers and restructuring.

l. Telecommunications: Technological change and deregulation in the United States and

~ Source:Thomson Financial Services.

TABLE 17.6 Industrial Classification of Selected Cross-Border Merg~~s

TABLE 17.7 Largest Recent Drug M&As

DEUTSCHE TELEKOM AG-ONE20NE

FRANCE TELECOM SA-ORANGE PLC

DEUTSCHE BANK AG-BANKERS TRUST NEW YORK CORPORATION

UBS AG-PAINEWEBBER GROUP

FORD MOTOR COMPANY-VOLVO AB-WORLD WIDE PASSENGER VEIDCLE BUSINESS

BRITISH PETROLEUM CORPORATION PLC-AMOCO CORPORATION.

UNION PACIFIC RESOURCES GROUP-NORCEN ENERGY RESOURCES LIMITED

SCOTTISH POWER PLC-PACIFICORP

TEXAS UTILITIES CORPORATION-ENERGY GROUP PLC

NESTLE SA-RALSTON PURINA

WAL-MART STORES INCORPORATED-ASDA GROUP PLC

ADVANTAGES IN DIFFERENTIATED PRODUCTS

A strong correlation exists between multinationalization and product differentiation (Caves,

POLITICAL ANO ECONOMIC STABILITY

The importance of long-term financia! relationships is a majar factor in international mergers

TABLE 17.8 Mean Premium in Foreign vs. Total

INTERNATIONAL JOINT VENTURES

A study of 88 international joint venture announcements found statistically significant pos-

COST OF CAPITAL IN FOREIGN ACQUISITIONS

COST OF DEBT RELATIONSHIPS

International business transactions are conducted in many different currencies. However, a U. S.

l. The interest rate parity theorem (IRPT)

The lnterest Rate Parity Theorem (IRPT)

We now illustrate a practica! way of developing numerical examples. We begin by looking

T1=1 + foreign country inflation rate =?

Using the data we have developed to this point, we have:

The lnternational Fisher Relation (IFR)

COST OF EQUITY ANO COST OF CAPITAL

TABLE 17.9 Calculation of Present Value in Pesos

TABLE 17.10 Calculation of Present Value in Dollars

Case 17.1 THE SAGA OF GERBER

Case 17.2 CIBA-GEIGY MERGER WITH

1Written by Erica Clark and J. F. Weston .

STRATEGIC REASONS FOR squeezed profits and forced industry restructuring.

Case 17.3 VODAFONE AIRTOUCH

2Written by Lynda Pires.

to discourage predatory behavior. After public COMPLETION OF "FRIENDLY"

The merger signaled an attempt by Vodafone to QUESTIONS

You might also like