Lecture 11
Cross Border Mergers and
Acquisitions
Mergers and Acquisitions as Part of FDI
FOREIGN DIRECT INVESTMENT
JOINT VENTURES
MERGERS
WHOLLY OWNED
SUBSIDIARIES
GREENFIELD
INVESTMENT
ACQUISITIONS
Mergers and Acquisitions Examples
• Mergers (a marriage between two companies):
– Royal Dutch Petroleum (60%) and Shell (UK) Transport and
Trading (40%) merged in 1907 as Royal Dutch Shell Group.
World’s #1 oil and gas firm; headquarters: The Hague, The
Netherlands; owns or has interests in about 50 refineries
worldwide. It operates more than 46,000 gas stations worldwide.
– Sony Corp. and Bertelsmann AG and announced plans (Nov 6,
2003) to merge Sony Music Entertainment and Bertelsmann's
BMG. The new company, to be called Sony BMG, would be
equally owned by Sony (Japan) and Bertelsmann (Germany). It
would bring together the world's No. 2 and No. 5 music
companies.
• Acquisition (one company acquiring another):
– Ford Motor Company buying Jaguar Cars Limited for $2.8 billion
in 1990.
– Daimler-Chrysler; In 1998 Daimler-Benz acquired Chrysler;
Automotive; headquarters: Stuttgart, Germany; manufacturing
facilities in 37 countries
Historical Cross-Border M&A Activity
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
2000
Historical Cross-Border M&A Activity
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
Cross Border M&A Data
• For year 2000:
– Total $1,229 billion
• $1,143 billion (92%) in developed countries
– $324 billion in U.S.
– $586 billion in EU.
• $86 billion (8%) in developing countries
– Most in Latin America and Asia.
The Driving Force for
Cross-Border M&A
• The main reason for cross-border M&A is
to create shareholder value (Anglo-Saxon
view).
• Public firms’ measure of enhancing
shareholder is mainly reflected in their
stock price.
– If the MNE’s share price is a combination of
earnings and the market’s opinion of those
earnings (i.e., the price to earnings multiple)
then management should strive to grow both.
Creating Shareholder Value
The Goal: Increase the share price of the firm
Price
Increasing the share
price means
increasing earnings.
=
EPS

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.
One growth potential is through going global.
Other Cross-Border M&A Drivers
• Additional cross-border M&A drivers can be viewed as
Micro (i.e., firm and industry level) in nature:
–
–
–
–
To gain access to strategic proprietary assets
To gain market power and dominance
To achieve synergies
To become larger and realize benefits of size in competition and
negotiation
– To diversify and spread risk
– To exploit financial opportunities
• And Macro (i.e., global competitive environment) in
nature:
– Technological changes
– Changes in regulation (deregulation)
– Globalization of capital markets
Cross-Border M&A Drivers
Cross - Border
M & A activity
MACRO FORCES: Changes in the Global Environment
New business
• Technology
opportunities
• Regulatory frameworks
and risks
• Capital market changes
Strategic responses by firms
to defend and enhance their
competitive positions in a
changing environment.
MICRO FORCES: Firms Undertake
M&A to:
• 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.
Cross-Border M&A Process
• Although most M&A is viewed solely as a
process of valuation, there is much more
to the process.
• The process of acquiring an enterprise has
three common elements
– Identification and valuation of the target firm
– Completion of the ownership change
transaction
– Management of the post-acquisition transition
Three Stages of Cross-Border
M&A
Stage I
Strategy
Corporate strategy and
&
identification
Management
of target firm
Financial
Analysis &
Strategy
Valuation
&
negotiation
Stage II
Stage III
Completion of
the ownership
change
transaction
(the tender)
Management of
the post-acquisition
transition; integration
of business
and culture
Financial
settlement
&
compensation
Rationalization of
operations;
integration of
financial goals;
achieving synergies
Stage 1: Identification and Valuation
• Stage 1: Identification and Valuation
– This requires a well defined corporate strategy and
focus.
– Identification stage of the target market typically
comes before the identification of the target firm.
• Highly developed markets offer wide choice of publicly traded
companies to select from.
– Valuation stage comes after identification of target
firm has taken place
• A variety of techniques can be used
• DCF, multiples, comparables, etc.
Stage 2: The Tender and Settlement
• Stage 2: The Tender and the Settlement
– Occurs after target firm has been identified and valued.
– Tender stage includes the securing the approval of the
management and ownership of the target to
governments and regulatory bodies.
• May result in friendly takeover (or need for hostile takeover).
• Regulatory approval is important for anti-monopolistic threats.
– Settlement (compensation) stage involves payment to
shareholders of the target firm.
• Payment can be in forms from cash to common stock of the
acquiring company.
• If common stock it is usually some ratio of acquiring company
share to target company shares
• A variety of factors determine the method of settlement:
availability of cash, size of the target firm.
Regulatory Approval
• Whether the mergers take place domestically or cross border, there
are potentially serious competition policy concerns for other
countries. If the largest producers in, say, the US automobile
industry merge, this may not only lead to anti-competitive behavior
in the US but also similar or worse behavior in other countries (e.g.
cartelization of markets, increased barriers to entry).
• In the 1997 Boeing-McDonnell Douglas takeover case, although
both companies were located in the US, the European Community
objected to the merger on account of its potentially competitionreducing effects in Europe, arguing it would create a global airline
monopoly. The European Union could not stop the deal but it did
threaten to fine Boeing and restrict its business with European
airlines Thus, the Community was able to extract important
concessions from Boeing before the merger was approved.
• Thus, it is also now commonplace for jurisdictions in other industrial
countries to scrutinize separately all large proposed mergers for
their effects on competition even if they occur abroad.
Stage 3: Post-acquisition
Management
• Stage 3: Post-acquisition Management
– May actually be the most critical stage
• Will determine the success or failure of the
acquisition .
• This stage can affect the ability of the deal to
create shareholder value.
• Potential problems:
– If the anticipated synergies are not met
– If the costs of integration become higher than anticipated
– If the melding of the two corporate cultures proves
difficult.
Wealth Gains from Cross Border
Acquisitions
AVERAGE WEALTH GAINS FROM CROSS-BORDER ACQUISITIONS:
FOREIGN ACQUISITIONS OF U.S. FRIMS, 1979-1990
Country of
Acquirer
Canada
Japan
U.K.
Others
Total
# of
cases
10
15
46
32
103
Average Wealth Gains (in Millions of US Dollars)
Acquirer Target
Combined
$14.93
227.83
-122.91
-47.46
-35.01
$85.69
170.66
94.55
89.48
103.19
$100.53
398.49
-28.36
42.02
68.18
•
Conclusions: U.S. target shareholders realized significant wealth gains, $103.19 million on
average. The wealth gains to acquiring shareholders, however, varied greatly across
acquiring countries.
•
Source: Eun, Kolodny and Scheraga (1996, Journal of Banking and Finance).
Financial Variables and FDI
• Question: What macroeconomic and financial variables play key
roles in the cross border merger and acquisition decision of firms?
• Julian di Giovanni. “What Drives Capital Flows? The Case of CrossBorder M&A Activity and Financial Deepening” (University of
California Working Paper, January 2002
• This question is addressed in this paper using a large data set of
cross-border Merger & Acquisition deals for the period 1990-1999.
Author finds that financial variables and other institutional factors in
the acquiring company’s country seem to play a significant role in
M&A flows.
• In particular the size of financial markets, as measured by the stock
market capitalization to GDP ratio and the credit provided to the
private sector by financial institutions to GDP ratio in the domestic
economy, have sizeable positive effects on the incentives for
domestic firms to invest abroad.
Summary of Lecture 11
• The number and dollar value of cross-border mergers and
acquisitions has grown rapidly in recent years, but the growth and
magnitude of activity is taking place in developed countries, not
developing countries
• The global marketplace offers greater growth potential. There are a
variety of ways for an MNE to enter foreign markets including
Greenfield investments and acquisitions
• The drivers of M&A activity are both macro in scope, the global
competitive market, and micro in scope, the variety of industry and
firm-level forces and actions driving individual firm value
• The process of acquiring an enterprise has three common elements,
(1) identification and valuation of the target, (2) completion of the
ownership change transaction and (3) the management of postacquisition transition