Corporate Financial Strategy
4th edition
Dr Ruth Bender
Chapter 19
International corporate finance
Corporate Financial Strategy
International corporate finance: contents
 Learning objectives
 Finding an international acquisition target
 Doing the deal
 Foreign exchange risk
 Hedging currency risk
 Long-term exchange rate movements (purchasing power parity) (1)
 Long-term exchange rate movements (purchasing power parity) (2)
 Financing international acquisitions
 Depository receipts
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Learning objectives
1. Appreciate how international corporate finance differs from the
domestic variety.
2. Explain the three sources of currency risk – translation, transaction
and economic – and understand how they can be mitigated.
3. Understand the theory underlying exchange rate movements.
4. Evaluate different methods of financing an international acquisition,
and appreciate their advantages and disadvantages.
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Finding an international acquisition target
 Will information be available in the target country?
 Will information be in a suitable form?
 How trustworthy is the information?
 Differences in accounting policies
 Differences in attitudes to corporate governance
 Cultural differences
 Language differences
 Regulatory constraints on an acquisition
A trusted and experienced local adviser is required
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Doing the deal
 Negotiation strategies
 Legal context
 Availability and interpretation of information
 Pricing difficulties
 Competition regulations
A trusted and experienced local adviser is required
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Foreign exchange risk
Transaction
risk
Translation
risk
Economic
risk
• Undertaking
transactions
in a foreign
currency
• Translate
transactions
into domestic
currency for
the financial
statements
• Value
changes due
to exchange
rate
movements
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Hedging currency risk
Forward contract
Fixes the rate of exchange for a future delivery of a specified sum of
money
Binding on both parties
Removes downside risk but limits flexibility
Foreign currency
option
Buyer has the choice as to whether to exercise the option when the
actual payment/receipt becomes due
Option contract can be used to establish a minimum rate which will
apply to the foreign exchange transaction
Option can be allowed to lapse if rates change in a more favourable
direction
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Long-term exchange rate movements (purchasing power
parity) (1)
USA company
$1 billion
investment –
cost of funds
10%
UK acquisition
Fund using US $ converted at spot
£250 million –
project return
of 20%
$4: £1
Expected
returns at 20%
less cost of
funds 10%.
Super profit
$100m p.a.
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Repatriation of profits
£100m at $2 = $200m
$2: £1
8
Produces UK
profits of 20%
but on inflated
(doubled)
sales prices
Long-term exchange rate movements (purchasing power
parity) (2)
USA company
$500 million
investment –
cost of funds
10%
UK acquisition
Fund using 50% UK borrowed funds,
$500m US $ funding
£250 million,
of which
£125m raised
locally
$4: £1
Expected
returns of
$150m give
super profit of
$100m after
funding cost of
$50m.
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£75m @ $2 = $150m
$2: £1
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Produces UK
profits
reduced by
funding costs
of £125m @
20%, i.e.
£25m.
Profits are
£75m p.a.
Financing international acquisitions
1. Raise equity on the home market, and use the proceeds to pay cash
to acquire the target
2. Raise debt, and use the proceeds to pay cash to acquire the target
−
Raise debt in home currency
−
Raise debt in target company’s currency
3. Issue shares tradable in the target’s country, which will be an
acceptable currency for shareholders
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Depository receipts
GDR – global depository receipt
– traded outside the USA
ADR – American depository receipt – traded inside the USA and
denominated in US$
Different levels issued, depending on whether they represent new shares (effectively an IPO) or existing
shares, and where the shares are traded, and the level of disclosure required.
Company outside USA
Bank in USA
Issues certificate
denoting multiple
underlying shares to
Issues certificates to
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Investors in USA