Chapter 19
Cross-Border
Mergers,
Acquisitions,
and Valuation
Cross-Border Mergers,
Acquisitions, and Valuation
• Although there are many pieces to the puzzle
of building shareholder value, ultimately it
comes down to growth.
• An increasingly popular route to “going
global” in search of new markets, resources,
productive advantages, and other elements of
competition and profit is through cross-border
mergers and acquisitions.
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19-2
Cross-Border Mergers,
Acquisitions, and Valuation
• Cross-border mergers, acquisitions, and
strategic alliances all face similar challenges:
they must value the target enterprise on the
basis of its projected performance in its
market.
• An enterprise’s potential value is a combination
of the intended strategic plan and the expected
operational effectiveness to be implemented
post-acquisition.
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19-3
Cross-Border Mergers
and Acquisitions
• The number and dollar value of cross-border
mergers and acquisitions (M&A) have grown
rapidly in recent years, but the growth and
magnitude of activity are taking place in the
developed countries, not developing countries.
• The following exhibit illustrates that the
growth in M&A within developed countries
has been torrid in recent years (particularly
within the EU and US).
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19-4
Exhibit 19.1 Cross-Border Mergers & Acquisitions:
Developed Countries (billions of US dollars)
European Union
United States
Japan
Other
600
500
400
300
200
100
0
1995
1996
1997
1998
1999
Source: United Nations Center for Trade and Development (UNCTAD).
2000
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Cross-Border Mergers
and Acquisitions
• The next slide, presents evidence of
cross-border M&A activity among the
developing countries.
• While the growth and magnitude looks
impressive, it is clear that the total M&A
activity in developing countries was only
a fraction (at 8%) of the total.
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19-6
Exhibit 19.2 Cross-Border Mergers & Acquisitions:
Developing Countries (billions of US dollars)
Africa
Asia
Latin America
West Asia
Eastern Europe
70
60
50
40
30
20
10
0
1995
1996
1997
1998
1999
2000
Source: United Nations Center for Trade and Development (UNCTAD).
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Cross-Border Mergers
and Acquisitions
• Among the developing regions of the
world, cross-border M&A activity has
been focused nearly exclusively on Latin
America and Asia.
• West Asia, Eastern Europe and Africa
have largely been bypassed in the
international rush to acquire.
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19-8
Cross-Border Mergers
and Acquisitions
• The true motivation for cross-border mergers
and acquisitions is a traditional one: to build
shareholder value.
• The following exhibit justifies this global
expansion as a result of the following:
– Publicly traded MNEs live and die, in the eyes of
the shareholders, by their share price
– If the MNE’s share price is a combination of the
earnings of the firm and the market’s opinion of
those earnings and the price-to-earnings multiple,
management must strive to grow both
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19-9
Cross-Border Mergers
and Acquisitions
– Management’s problem is that it does not directly
influence the market’s opinion of its earnings
– Although management’s responsibility is to increase
the P/E ratio, this is a difficult, indirect, and longterm process of communication and promise
fulfillment
– However, management does control EPS and often
must look outward to build value
– The global marketplace can offer greater growth
potential or “bang for the buck” when compared to
struggling within a domestic market for market
share and profits
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19-10
Exhibit 19.3 Building Shareholder Value
Means Building Earnings
The Goal: Increase the share price of the firm
Price
Increasing the share
price means
increasing earnings.
=
EPS
x
Management, directly
controls through its
efforts the earnings per
share of the firm.
P
E
Management only
indirectly influences
the market’s opinion
of the company’s earnings
as reflected in the P/E.
So building “value” means growing the firm to grow earnings.
The largest growth potential is global.
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Cross-Border Mergers
and Acquisitions
• In addition to the desire to grow, MNEs are
motivated to undertake cross-border mergers
and acquisitions by a number of other factors.
• The United Nations Conference on Trade and
Development (UNCTAD), has summarized the
M&A drivers in the following exhibit.
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19-12
Exhibit 19.4 Driving Forces Behind Cross Border M&A
Cross - border M & A activity
Changes in the Global Environment
• Technology
• Regulatory frameworks
• Capital market changes
New business
opportunities
and risks
Firms Undertake M&As to:
Strategic responses by firms
to defend and enhance their
competitive positions in a
changing environment.
•
•
•
•
•
•
Access strategic proprietary assets
Gain market power & dominance
Achieve synergies
Become larger
Diversify & spread risks
Exploit financial opportunities
time
Source: UNCTAD, World Development Report 2000: Cross-border Mergers and Acquisitions
and Development, figure V.1., p. 154.
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Cross-Border Mergers
and Acquisitions
• The drivers of M&A activity are both macro in
scope (the global competitive environment)
and micro in scope (the variety of industry and
firm-level forces and actions driving individual
firm value).
• The primary forces of change in the global
competitive environment – technological
change, regulatory change, and capital markets
change – create new business opportunities for
MNEs.
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19-14
Cross-Border Mergers
and Acquisitions
• As shown in exhibit 19.4, MNEs undertake crossborder M&A for a variety of reasons.
• The drivers are strategic responses by MNEs to defend
and enhance their global competitiveness by:
– Gaining access to strategic proprietary assets
– Gaining market power and dominance
– Achieving synergies in local/global operations across different
industries
– Becoming larger, and then reaping the benefits of size in
competition and negotiation
– Diversifying and spreading their risks wider
– Exploiting financial opportunities they may possess
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19-15
Cross-Border Mergers
and Acquisitions
• As opposed to a greenfield investment, a cross-border acquisition
has a number of significant advantages.
• First, it is quicker (shortening the time required to gain a presence
and facilitate competitive entry into the market).
• Second, acquisition may be a cost-effective way of gaining
competitive advantages such as technology, brand names, and/or
logistic/distribution capabilities while eliminating a local
competitor.
• Third, specific to cross-border acquisitions, international
economic, political, and foreign exchange conditions may result in
market imperfections, allowing target firms to be undervalued.
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19-16
Cross-Border Mergers
and Acquisitions
• Cross-border acquisitions are not, however, without
their pitfalls.
• There are still problems with paying too much or
suffering excessive financing costs.
• Melding corporate cultures can also be traumatic.
• In addition, management of the post-acquisition
process is extremely difficult to do successfully.
• Internationally, additional difficulties arise from host
governments intervening in pricing, financing,
employment guarantees, market segmentation, and
general nationalism and favoritism.
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19-17
The Cross-Border
Acquisition Strategy
• The process of acquiring an enterprise
anywhere in the world has three common
elements:
– Identification and valuation of the target
– Completion of the ownership change
transaction (the tender)
– Management of the post-acquisition
transition
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19-18
Exhibit 19.5 The Cross-Border Acquisition Process
Stage I
Stage II
Stage III
Strategy
&
Management
Identification
& valuation
of the target
Completion of
the ownership
change
transaction
(the tender)
Management of
the post-acquisition
transition; integration
of business
and culture
Financial
Analysis &
Strategy
Valuation
&
negotiation
Financial
settlement
&
compensation
Rationalization of
operations;
integration of
financial goals;
achieving synergies
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The Cross-Border
Acquisition Strategy
• Stage I – Involves the identification task for firms that
have promising market opportunities and may be
amenable to suitors in addition to valuation using
traditional (DCF) and multiples (earnings and cash
flows) analysis.
• Stage II – Requires gaining the approval of the target
company (target company management support),
regulatory approval and the appropriate compensation
settlement for target shareholders.
• Stage III – This critical process requires the realization
of the motivations for the transaction itself and can be
extremely difficult for a variety of reasons.
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19-20
Corporate Governance
and Shareholder Rights
• One of the most controversial issues in
shareholder rights is at what point in the
accumulation of shares is the bidder required to
make all shareholders a tender offer.
• While every country possesses a different set
of rules and regulations for the transfer of
control, the market for corporate control has
been the subject of enormous debate in recent
years.
• There are many elements involved in the
regulation of cross-border takeovers.
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19-21
Cross-Border Valuation
• Illustrative case: The potential acquisition of
Tsingtao brewery Company, Ltd., China
– In January 2001, Anheuser Busch (AB) was
considering acquiring a larger minority interest in
Tsingtao Brewery Company Ltd., China
– AB had originally acquired a 5% equity interest in
1993 when Tsingtao had first been partly privatized
– Since AB had already identified the target (Phase I),
it would only need to value the target’s shares
(Phase II) and to assess its prospects for post
acquisition influence on Tsingtao’s operations
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19-22
Cross-Border Valuation
• In 1999, negotiations had broken down between AB and Tsingtao
because Tsingtao would not offer AB a voice in its operations.
• However, by 2001, Tsingtao needed an equity infusion to grow its
business.
• Key questions for AB were:
– The valuation of Tsingtao shares in an illiquid Chinese market
– The percentage of Tsingtao’s total equity to be purchased
– The terms of the transaction
– The prospects for AB to contribute management skills to Tsingtao
– The degree of future compatibility between the two corporate
cultures
– The potential for future rationalization of operations
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19-23
Cross-Border Valuation
• As a fundamental metric in the determination
of value, free cash flow (FCF) is a critical input
in the valuation of any enterprise.
FCF = NOPAT + D&A – Δ in NWC – CAPEX
• Where:
– NOPAT = net operating profit after tax
– D&A = depreciation and amortization
– NWC = net working capital
– CAPEX = capital expenditures
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19-24
Cross-Border Valuation
• Analyzing Tsingtao’s FCF for 2000 shows a healthy operating
cash flow (OCF) but a negative FCF due to enormous capital
expenditures.
• For valuation purposes, this (and previous years) detailed financial
data is utilized in forecasting expected future free cash flows (in
this example in local currency).
• These free cash flows are valued using a risk-adjusted discount
rate; in this methodology the Tsingtao (local currency) WACC is
used.
• In addition, the terminal value of the firm, beyond the FCF
projection period, is also added to the value of the FCF to
determine the entity value.
• Equity value is determined by subtracting the PV of debt capital.
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19-25
Cross-Border Valuation
• In addition to the DCF exercise, a multiples
analysis is performed by analyzing (in this
case):
– Price/Earnings Ratio (P/E) - an indication of what
the market is willing to pay for a currency unit of
earnings
– Market/Book Ratio (M/B) - provides some measure
of the market’s assessment of the employed capital
per share versus what the capital cost
– Other multiples – including (in this case) price/sales
or entity/enterprise value to EBTIDA (business
earnings)
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19-26