1、Cross-Border Mergers and Acquisitions: Analysis, Structuring and ValuationCourage is not the absence of fear. It is doing the thing you fear the most. Rick WarrenExhibit 1: Course Layout: Mergers, Acquisitions, and Other Restructuring ActivitiesPart IV: Deal Structuring and FinancingPart II: M&A Pro
2、cessPart I: M&A EnvironmentCh. 11: Payment and Legal ConsiderationsCh. 7: Discounted Cash Flow ValuationCh. 9: Financial Modeling TechniquesCh. 6: M&A Postclosing IntegrationCh. 4: Business and Acquisition PlansCh. 5: Search through Closing ActivitiesPart V: Alternative Business and Restructuring St
3、rategies Ch. 12: Accounting & Tax ConsiderationsCh. 15: Business AlliancesCh. 16: Divestitures, Spin-Offs, Split-Offs, and Equity Carve-OutsCh. 17: Bankruptcy and LiquidationCh. 2: Regulatory ConsiderationsCh. 1: Motivations for M&APart III: M&A Valuation and Modeling Ch. 3: Takeover Tactics, Defens
4、es, and Corporate GovernanceCh. 13: Financing the Deal Ch. 8: Relative Valuation MethodologiesCh. 18: Cross-Border TransactionsCh. 14: Valuing Highly Leveraged Transactions Ch. 10: Private Company ValuationLearning Objectives Primary Learning Objective: To provide an overview of how to analyze, stru
5、cture, and value cross-border M&As-Illustrate using July 1, 2011 Nestle takeover of Chinas Hsu Fu Chi Secondary Learning Objectives: To provide an understanding of Motives for international expansion Common international market entry strategies A structured cross-border M&A process Planning and impl
6、ementing cross-border transactions in developed countries Planning and implementing cross-border transactions in emerging countries. Characteristics and determinants of cross-border M&As Valuing cross-border transactions Empirical studies of financial returns to international diversificationGlobally
7、 Integrated Versus Segmented Capital Markets Globally integrated capital markets provide foreigners with unfettered access to local capital markets and local residents to foreign capital markets. Segmented capital markets Exhibit different bond and equity prices in different geographic areas for ide
8、ntical assets in terms of risk and maturity. Arise when investors are unable to move capital from one market to another due to capital controls or a preference for local market investmentsDeveloped Versus Emerging Countries Developed countries: Characterized by Significant/sustainable per capita GDP
9、 growth; Globally integrated capital markets; Well-defined legal system; Transparent financial statements; Currency convertibility; and Stable government. Emerging countries: Characterized by A lack of many of the characteristics of developed countriesMotives for International Expansion Geographic a
10、nd industrial diversification Accelerating growth Industry consolidation Utilization of lower raw material and labor costs Leveraging intangible assets Minimizing tax liabilities Avoiding entry barriers Avoiding fluctuating exchange rates Following customersCommon Market Entry Strategies Mergers & a
11、cquisitions (Offer quick access but often expensive, complex, and beset by cultural issues) Greenfield or solo ventures (May offer above average returns but total investment is at risk) Alliances and joint ventures (Allows risk/cost sharing & access to others resources; may facilitate entry; but mus
12、t share profits and creates potential competitors) Exporting (Cheaper than establishing local operations but still requires local marketing/distribution channels) Licensing (Least profitable and risky entry strategy and lack of control could jeopardize brand or trademark)Discussion Questions1.What a
13、re the differences between segmented and globally integrated capital markets? How do these distinctions affect prices of financial assets of comparable risk and maturity in various countries?2.Of the various motives for international expansion, which do you believe is the most common and why?3.Do yo
14、u believe that some market entry strategies are more suitable for emerging than for developed countries? Explain your answer.Characteristics and Determinants of Cross-Border Mergers and AcquisitionsOn average, about one-third of global M&A activity involve cross-border transactions.Most cross-border
15、 M&As involve private firms outside of the U.S.Geography (proximity), accounting disclosure, and bilateral trade increase the likelihood of mergers between two countries.Firms in countries with rising stock markets, appreciating currencies, and whose shares may be overvalued tend to be acquirers.Fir
16、ms in countries with declining stock markets, depreciating currencies and whose shares may be undervalued tend to be targets.Source: Isil Erel, Rose C. Liao, and Michael S. Weisbach, Determinants of Cross-Border Mergers and Acquisitions, forthcoming Journal of Finance, 2012. Results reflect 59,172 M
17、&A transactions between 1990 and 2007.The Acquisition ProcessPre-Purchase Decision ActivitiesPost-Purchase Decision ActivitiesPhase 1: Business PlanPhase 2: Acquisition PlanPhase 3: SearchPhase 4: ScreenPhase 5: First ContactPhase 6: NegotiationPhase 7: Integration PlanPhase 8: ClosingPhase 9: Integ
18、rationPhase 10: EvaluationImplementing Cross-Border Transactions in Developed CountriesForeign acquirers of U.S. businesses Acquisition vehicle: Often use C-corporations, limited liability companies, or partnerships Form of payment: Most often cash Form of acquisition: Share acquisitions generally t
19、he simplest Post-merger organization: Centralized organization (division structure) used to rapidly realize synergies but decentralized operations (holding company) used where cultural differences significant Tax strategies: Share for share acquisitions may defer tax liability for target firm shareh
20、olders Cash for share acquisitions may trigger tax liability for target firm shareholders Why is cash the preferred form of payment in most cross-border M&As?Implementing Cross-Border Transactions in Developed Countries Contd.Acquisitions by U.S. and Non-U.S acquirers of foreign businesses Acquisiti
21、on vehicle: Corporate-like structures in common law countries (e.g., U.S.); share companies or limited liability countries in civil law nations (e.g., China) Form of payment: Generally cash Form of acquisition: Share acquisitions generally simplest Post-closing organization: Holding company structur
22、e if target to be operated as independent unit or integrated with acquirers existing “in-country” operations Tax strategies: Highly complex and vary with local tax and legal jurisdictionsImplementing Cross-Border Transactions in Emerging CountriesPoses challenges not common to developed countries su
23、ch as political and economic risks including: Excessive local government regulation; Confiscatory tax policies; Restrictions on cash remittances; Currency inconvertibility; Expropriation of foreign assets; Local corruption; and Civil war and local insurgenciesManaging risk through insurance (e.g., O
24、PIC, World Bank) and contract options (e.g., puts)Valuing Cross-Border TransactionsMethodology similar to that employed when acquirer and target in same country Discounted cash flow (i.e., converting future cash flows to a present value) Relative valuation multiples (i.e., purchase price as a multip
25、le of the target firms annual revenue)Basic differences between within country and cross-border include the following: Need to convert target cash flow projections into acquirer home country currency Adjusting discount rate1 for risks uncommon in “within country” valuations (e.g., political/business
26、 risk, exchange rate risk)1The discount rate is the cost of capital used to convert future cash flows to a present value.Projecting Future Currency Exchange Rates Objective: Convert target (local country) projected cash flows into acquirer (home country) currency How: Predict forward (future spot) e
27、xchange rates based on interest rate parity (IRP) or purchasing power parity (PPP) theories Spot exchange rates ($/) = the current number of dollars required to buy one Euro Forward exchange rate = the rate at which a bank is willing to exchange one dollar for one Euro at some specified future date
28、Forward exchange rates are determined by differences between interest rates (IRP) and prices (PPP) in the two countriesInterest Rate Parity TheoryProjecting the Forward Dollar/Euro Exchange Rate Based on U.S. Interest Rates Compared to Eurozone Country Interest Rates:($/)n/($/)0 = (1 + R$n)n/(1 + Rn
29、)n ($/)n = (1 + R$n)n/(1 + Rn)n x ($/)0 Where ($/)n = Forward $ exchange rate n periods into the future ($/)0 = $/Euro spot rate R$n = Interest rate in U.S. Rn = Interest rate in European UnionProjecting the Forward Euro/Dollar Exchange Rate Based on Eurozone Country Interest Rates Compared to U.S.
30、Interest Rates:(/$)n/(/$)0 = (1 + Rn)n/(1 + R$n)n(/$)n = (1 + Rn)n/(1 + R$n)n x (/$)0 Where (/$)n = Forward Euro exchange rate n periods into the future (/$)0 = Euro/$ spot rate 2012 2013 2014Targets Euro-Denominated 124.5 130.7 136.0 FCFF Cash Flows ( Millions)Target Countrys Interest Rate (%) 4.50
31、 4.70 5.30U.S. Interest Rate (%) 4.25 4.35 4.55Current Spot Rate ($/) = 1.2044Projected Spot Rate ($/) = 1.2015 1.1964 1.1788Targets Dollar-Denominated $149.59a $156.37 $160.32 FCFF Cash Flows ($ Millions) Notes: Calculating the projected spot rate using Interest Rate Parity.($/)2012 = (1.0425)/(1.0
32、450) x 1.2044 = 1.2015($/)2013 = (1.0435)2/(1.0470)2 x 1.2044 = 1.1964($/)2014 = (1.0455)3/(1.0530)3 x 1.2044 = 1.1788 Converting Euro-Denominated into Dollar-Denominated Free Cash Flows to the Firm Using Interest Rate Parity Theorya$149.59 = 124.5 x 1.2015 Purchasing Power Parity TheoryProjecting t
33、he Forward Dollar/Peso Exchange Rate Based on U.S. Price Levels Compared to Mexican Price Levels:($/Peso)n/($/Peso)0 = (1 + Pus)n/(1 + Pmex)n ($/Peso)n = (1 + Pus)n/(1 + Pmex)n) x ($/Peso)0 Where ($/Peso)n = Forward $/Peso exchange rate n periods into the future ($/Peso)0 = Spot $/Peso exchange rate
34、 Pus = Expected U.S. inflation rate Pmex = Expected Mexican inflation rate Projecting the Forward Peso/Dollar Exchange Rate Based on Mexican Price Levels Compared to U.S. Price Levels:(Peso/$)n/(Peso/$)0 = (1 + Pmex)n/(1 + Pus)n(Peso/$)n = (1 + Pmex)n/(1 + Pus)n) x (Peso/$)0 Where (Peso/$)n = Forwar
35、d Peso/$ exchange rate n periods into the future (Peso/$)0 = Spot Peso/$ exchange rate 2012 2013 2014Targets Peso-Denominated P1,050.5 P1,124.7 P1,202.7 FCFF Cash Flows (Millions of Pesos)Mexican Expected Inflation Rate = 6% U.S. Expected Inflation Rate = 4% Spot Rate ($/Peso) = .0877Projected Spot
36、Rate ($/Peso) .0860 .0844 .0828Targets Dollar-Denominated $90.34a $94.92 $99.58 FCFF Cash Flows (Millions of $) Notes: Calculating the projected spot rate using Purchasing Power Parity.($/Peso)2012 = (1.04)/(1.06) x .0877 = .0860($/Peso)2013 = (1.04)2/(1.06)2 x .0877 = .0844($/Peso)2014 = (1.04)3/(1
37、.06)3 x .0877 = .0828a$90.34 = P1,050.5 x .0860Converting Peso-Denominated Into Dollar Denominated Free Cash Flows to the Firm Using Purchasing Power Parity TheoryEstimating Cost of Equity for Developed Countries Developed countries exhibit little differences in cost of equity because of globally in
38、tegrated capital markets. Therefore, the Global CAPM can be written as follows: ke,dev = Rf + devfirm,global (Rm Rf) + FSP Where ke,dev = Required return on equity for a firm in a developed country Rf = Local countrys risk-free rate of return if cash flows in local currency or U.S. treasury bond rat
39、e if in dollars devfirm,global = Nondiversifiable risk for globally diversified portfolio or well- diversified portfolio highly correlated with the global portfolio (Rm Rf) = Difference in expected return on global market portfolio, U.S. equity index, or broadly defined index in the local country an
40、d the Rf FSP = Premium small firms must earn to attract investors Key Point: When capital markets are fully integrated, equity investors hold globally diversified portfolios and the equity premium is the same for all investors when measured in the same currency.Estimating Cost of Equity for Emerging
41、 CountriesEmerging countries may exhibit significant differences in the cost of equity due to segmented capital markets. Therefore, the CAPM may be written as follows:ke,em = Rf + emfirm,global (Rcountry Rf) + FSP + CRP whereRf = Local risk free rate or U.S. treasury bond rate converted to a local n
42、ominal rate if cash flows are in the local currency; if cash flows in dollars, the U.S. treasury rate(Rcountry Rf) = Difference between expected return on a broadly defined equity index in the local country or in a similar country and the risk free rateemfirm,global = Emerging country firms global b
43、etaCRP = Specific country risk premium expressed as difference between the local countrys (or a similar countrys) government bond rate and the U.S. treasury bond rate of the same maturityFSP = Premium small firms must earn to attract investorsKey Point: For emerging countries, the equity risk premiu
44、m may not reflect all the risk associated with investing in that country and the cost of equity may have to be adjusted for such things as political risk.Estimating the Cost of DebtFor developed countries, the targets local or the acquirers home country cost of debt.For emerging countries, the cost
45、of debt (iemfirm) is as follows: iemfirm = Rf + CRP + FRP Where Rf = Risk free rate (see preceding slide.) CRP = Specific country risk premium (see preceding slide) FRP = Firms default risk premium (i.e., additional premium for similar firms rated by credit rating agencies or estimated by comparing
46、interest coverage ratios used by rating agencies to the firms interest coverage ratios to determine how they would rate the firm.)Evaluating Emerging Country Risk Using Scenario PlanningRisk may be incorporated into the valuation by considering alternative economic scenarios for the emerging country
47、.Projected cash flows for alternative scenarios could reflect different GDP growth rates, inflation rates, interest rates, foreign exchange rates, or alternative political conditions. If risk is included by calculating a weighted average of alternative scenarios, the discount rate should not be adju
48、sted for specific country risk.Financial Returns to Cross-Border Mergers and AcquisitionsCombined “excess” financial returns1 (including acquirer and target firm shareholders) in M&A transactions worldwide average15% on the announcement date. (Returns may vary with the characteristics of the deal, e
49、.g., hostile versus friendly)Most of the combined financial return is earned by target firm shareholdersAcquiring firm shareholders experience “excess” financial returns of 1 to 1.5%Key Point: Contrary to conventional wisdom, acquisitions on average create value for both acquirer and target firm sha
50、reholders.1Excess financial returns are those realized over and above what would have been earned had no acquisition occurred. Source: Jeffrey Netter, Mike Stegemoller, and M. Babajide Wintoki, Implications of Data Screens on Merger and Acquisition Analysis: A Large Sample Study of Mergers and Acqui
