Chapter 17

International Takeovers
and Restructuring
 Patterns of International M&As
Worldwide M&A Activity ($ Billions)

4,000
3,500
3,000
2,500 1,779
2,000 979
749 478 920
1,500
338 397
1,000 297
500 1,005 998 1,308
846
0
1998 1999 2000 2001
US only US and Non US Non US only

Chapter 17-2
 Patterns of International M&As
 Reasons for recent international M&As
• Europe is moving toward a common market
• Globalization and increased intensity of international
competition
• Rapid technological change
• Consolidation of major industries
 Characteristics
• Mainly horizontal or consolidating mergers
• Concentration in industries influenced by M&A
change forces: telecom (deregulation), media
(technology), financial (servicing international
clients), pharmaceutical (R&D scale), Autos (excess
capacity), etc.
Chapter 17-3
 Examples of Cross-Border Deals

• Ford sought to expand economies of scale,
distribution network, distinctive brand
• Volvo (Swedish) strengthened Ford’s position
in Europe

• UBS (Swiss) wanted to improve worldwide
image and position in US market
• PaineWebber had strong distribution –
combined firm had opportunity and resources
to target “average investor

Chapter 17-4
 Examples of Cross-Border Deals

• Orange (UK) was required to be divested from
Mannesmann (German) when it was acquired
by Vodafone (UK)
• France Telecom sought to strengthen its
European wireless network

• Nestle (Swiss) was the largest food company
and sought Ralston Purina to solidify its share
of pet food
• Pet food was forecast as one of the fastest
growing food segments
Chapter 17-5
Forces Driving Cross-Border M&As
 Growth – most important force
• Enable firms to grow beyond domestic market
• May allow mid-sized firms to attain size
necessary to compete in industries
• Efficient global competition requires size for
economies of scale
 Technology
• Ability for technologically superior firm to
exploit tech advantage worldwide
• Technology is easier to transfer across borders
because of lack of cultural baggage
 Roll-ups – mergers in fragmented industries
Chapter 17-6
Forces Driving Cross-Border M&As
 Extend advantages in differentiated products –
domestic reputation aids acceptance abroad
 Consolidation – adjust to world excess capacity
 Government policy – avoid tariffs, quotas, etc.
 Exchange rates – affect relative prices of
foreign acquisitions and doing business abroad
 Political/economic stability – increases certainty
of gaining return on investment
 Following clients – service firms go
international to serve international clients
 Diversification – foreign acquisitions allow
firms to diversify geographically, etc.
Chapter 17-7
 Premiums Paid
 Foreign bidders tend to pay higher premium for
US targets
• 1970-87, foreign higher by 10% partly due to high
foreign currency values (Harris, Ravenscraft,
1991)
• 1987-2001, foreign buyers pay 4% higher
premium
 Possible reasons for higher premium
• US targets – less knowledge of foreign buyer
• Strong foreign currencies or anticipated favorable
exchange rate movement
• Foreign firm may need to preempt domestic buyer

Chapter 17-8
 Event Returns
 Generally similar results to domestic: large
returns to targets; buyer small, insignificant
 Multinational firms gain largest when foreign
acquisitions diversify industry and geography
(Doukas, Travlos, 1988)
 Japanese takeovers of US firms create wealth
for bidder and target (Kang, 1993)
 US acquirers have lower returns in foreign
acquisitions (Moeller, Schligemann, 2002)

Chapter 17-9
 Event Returns
Author Year Type Return
Eun et al 1996 US target 37.0%
Cakici et al 1996 Foreign buyer of US 0.63%
US buys US -0.36%
Doukas 1995 US buys foreign (q>1) 0.41%
US buys foreign (q<1) -0.18%
Seth et al 2000 Foreign buyer of US 0.11%
US target 38.3%
Markides, 1998 Foreign buyer of US 0.38%
Oyon European buyer 0.47%
Chapter 17-10
 International Joint Ventures
 Advantages
• May be requirement of local government –
possibly only way to obtain raw materials, etc.
• Local partners may reduce risks of operating in
foreign country
• Different countries may have better and
transferable technology, managerial skills, etc.
 Disadvantages
• Transfers info which may create future
competitor
• Cultural differences may increase the tensions
inherent in joint ventures
Chapter 17-11
 International Joint Ventures
 Principles for management
• Should involve complementary capabilities
• Contracts should make it easy to terminate
relationship
• Control & decision makers should be specified
• Formulate terms under which one company can
buy out other
• Activities and information flows should be tied
into normal communications structures
• Define criteria for evaluation of performance
• Allocation of rewards and responsibilities under
different outcomes should be considered
Chapter 17-12
 International Joint Ventures
 Significant positive returns when US firms
invest relatively small amounts in JV – results
insignificant for large investments (Chen, Hu,
Shieh, 1991)
 Case study of 7 steel JVs (Magnum, Kim,
Tallman, 1996)
• Most Japan/US, generally successful
• Tensions from cross-culture differences
 Evidence of decline in US international JV
activity between 1982-97 – better worldwide
integration makes it easier for US firms to own
100% assets (Desai, Foley, Hines, 2002)
Chapter 17-13
 Cost of Capital – International
 Cost of debt relationships
• International parity relationships assume perfect and
efficient markets
• Interest rate parity theorem
X f 1  R f 0 E0
 
– Ratio of forwardX 0 and
1 spot
Rd 0 rates
E f equals current ratio
of foreign and domestic nominal interest rates
• Forward parity theorem
– Current forward exchange rates should be
unbiased predictors of future spot rates
– Xf should equal X1

Chapter 17-14
 Cost of Capital – International
 Cost of debt relationships
• Purchasing power parity theorem
– Expresses the law of one price – goods and assets
must have equal prices worldwide (after exchange
rates, info/transaction costs)
X1 Tf

X 0 Td– nominal interest rates
• International Fisher relation
reflect anticipated inflation (real rates should be the
same across countries

• In short-run, many
1 market imperfections;
Rn  (1  r) T long-run
rates tend toward parity theorems
Chapter 17-15
 Cost of Capital – International
 Cost of equity and cost of capital
• Capital asset pricing model (CAPM):
Cost of capital = risk-free rate + (market price of
risk * beta measure of firm/project)
• Market definition: moving toward integrated
global markets (risk measured vs. world indices)
from segmented markets (risk measured vs. local
indices)
• Investors are still biased toward home market
(info costs, uncertainty in foreign markets)
• If markets not integrated, firms may gain from
international diversification, multinationals would
differ cost of capital between markets
Chapter 17-16
 Cost of Capital – International
 Procedure
• Cost of equity for a foreign investment in nominal
foreign currency terms should reflect risk differential
above cost of debt borrowing in that foreign country
• Cost of capital calculated based on an estimated
leverage ratio and tax rate
• Cash flows expressed in foreign currency units (FC)
discounted by the FC cost of capital gives present
value expressed in FC
• Present value in FC can be converted to dollars at the
spot exchange rate to give net present value of
investment in dollars

Chapter 17-17
 Cost of Capital – International
 Similar alternate procedure
• Begin with expected cash flows in FC
• Adjust expected cash flows by risk factors that
reflect foreign country's risk
• Convert risk-adjusted expected FC cash flows to
dollars over time by using expected foreign
exchange rates at time t based on interest rate
parity and relative inflation rates
t
 Tf 
X t  X 0  
 Td 
• Discount dollar cash flows by WACC of U.S. firm
Chapter 17-18