Multinational Business Finance ELEVENTH EDITION Chapter 19 Cross-Border Mergers, Acquisitions, and valuation David K. Artirur 1. Michael H. EITEMAN·STONEHILL·MOFFETT Copyright 2007 Pearson Addison-Wesley.All rights reserved
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Chapter 19 Cross-Border Mergers, Acquisitions, and Valuation
Cross-Border Merger 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. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 19-2
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 19-2 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
Cross-Border Merge 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. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 19-3
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 19-3 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
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 Copyright 2007 Pearson Addison-Wesley.All rights reserved. 19-4
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 19-4 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
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 long- term 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 Copyright 2007 Pearson Addison-Wesley.All rights reserved. 19-5
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 19-5 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
Exhibit 19.1 Building Shareholder Value Means Building Earnings The Goal:Increase the share price of the firm Price EPS Increasing the share Management directly Management only indirectly price means controls through its influences the market's increasing earnings. efforts the earnings per opinion of the company's share of the firm. earnings as reflected in the P/E. Building "value"means growing the firm to grow earnings. The largest growth potential is global. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 19-6
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 19-6 Exhibit 19.1 Building Shareholder Value Means Building Earnings
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. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 19-7
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 19-7 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
Exhibit 19.2 Driving Forces Behind Cross-Border M&A Cross-border M&A activity Changes in the Global Environment ·Technology New business Regulatory framework opportunities Capital market changes and risks ↓↓↓ ↑↑↑ Firms Undertake M&As to: Strategic responses by Access strategic propriety assets firms to defend and Gain market power dominance enhance their competitive ·Achieve synergies positions in a changing ·Become larger environment. 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. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 19-8
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 19-8 Exhibit 19.2 Driving Forces Behind Cross-Border M&A
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. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 19-9
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 19-9 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
Cross-Border Mergers and Acquisitions .As shown in exhibit 19.2.MNEs undertake cross- border 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 Copyright 2007 Pearson Addison-Wesley.All rights reserved. 19-10
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 19-10 Cross-Border Mergers and Acquisitions • As shown in exhibit 19.2, MNEs undertake cross- border 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