Characteristics and Determinants of CrossBorder … .pptx

cross bordermergersandacquisitions analysis structuringandvaluation courageisnottheabsenceoffear itisdoingthethingyoufearthemost rickwarren learningobjectives primarylearningobjective toprovideanoverviewofhowtoanalyze structure andvaluecross borderm as illustrateusingjuly1 2011nestletakeoverofchina shsufuchisecondarylearningobjectives toprovideanunderstandingofmotivesforinternationalexpansioncommoninternationalmarketentrystrategiesastructuredcross borderm aprocessplanningandimplementingcross bordertransactionsindevelopedcountriesplanningandimplementingcross bordertransactionsinemergingcountries characteristicsanddeterminantsofcross borderm asvaluingcross bordertransactionsempiricalstudiesoffinancialreturnstointernationaldiversification globallyintegratedversussegmentedcapitalmarkets globallyintegratedcapitalmarketsprovideforeignerswithunfetteredaccesstolocalcapitalmarketsandlocalresidentstoforeigncapitalmarkets segmentedcapitalmarketsexhibitdifferentbondandequitypricesindifferentgeographicareasforidenticalassetsintermsofriskandmaturity arisewheninvestorsareunabletomovecapitalfromonemarkettoanotherduetocapitalcontrolsorapreferenceforlocalmarketinvestments developedversusemergingcountries developedcountries characterizedbysignificant sustainablepercapitagdpgrowth globallyintegratedcapitalmarkets well definedlegalsystem transparentfinancialstatements currencyconvertibility andstablegovernment emergingcountries characterizedbyalackofmanyofthecharacteristicsofdevelopedcountries motivesforinternationalexpansion geographicandindustrialdiversificationacceleratinggrowthindustryconsolidationutilizationoflowerrawmaterialandlaborcostsleveragingintangibleassetsminimizingtaxliabilitiesavoidingentrybarriersavoidingfluctuatingexchangeratesfollowingcustomers commonmarketentrystrategies mergersbutmustshareprofitsandcreatespotentialcompetitors exporting cheaperthanestablishinglocaloperationsbutstillrequireslocalmarketing distributionchannels licensing leastprofitableandriskyentrystrategyandlackofcontrolcouldjeopardizebrandortrademark discussionquestions whatarethedifferencesbetweensegmentedandgloballyintegratedcapitalmarkets howdothesedistinctionsaffectpricesoffinancialassetsofcomparableriskandmaturityinvariouscountries ofthevariousmotivesforinternationalexpansion whichdoyoubelieveisthemostcommonandwhy doyoubelievethatsomemarketentrystrategiesaremoresuitableforemergingthanfordevelopedcountries explainyouranswer characteristicsanddeterminantsofcross bordermergersandacquisitions onaverage aboutone thirdofglobalm aactivityinvolvecross bordertransactions mostcross borderm asinvolveprivatefirmsoutsideoftheu s geography proximity accountingdisclosure andbilateraltradeincreasethelikelihoodofmergersbetweentwocountries firmsincountrieswithrisingstockmarkets appreciatingcurrencies andwhosesharesmaybeovervaluedtendtobeacquirers firmsincountrieswithdecliningstockmarkets depreciatingcurrenciesandwhosesharesmaybeundervaluedtendtobetargets source isilerel rosec liao andmichaels weisbach determinantsofcross bordermergersandacquisitions forthcomingjournaloffinance 2012 resultsreflect59 172m atransactionsbetween1990and2007 theacquisitionprocess pre purchasedecisionactivitiespost purchasedecisionactivities phase1 businessplanphase2 acquisitionplanphase3 searchphase4 screenphase5 firstcontactphase6 negotiationphase7 integrationplanphase8 closingphase9 integrationphase10 evaluation implementingcross bordertransactionsindevelopedcountries foreignacquirersofu s businessesacquisitionvehicle oftenusec corporations limitedliabilitycompanies orpartnershipsformofpayment mostoftencashformofacquisition shareacquisitionsgenerallythesimplestpost mergerorganization centralizedorganization divisionstructure usedtorapidlyrealizesynergiesbutdecentralizedoperations holdingcompany usedwhereculturaldifferencessignificanttaxstrategies shareforshareacquisitionsmaydefertaxliabilityfortargetfirmshareholderscashforshareacquisitionsmaytriggertaxliabilityfortargetfirmshareholders whyiscashthepreferredformofpaymentinmostcross borderm as implementingcross bordertransactionsindevelopedcountriescont d acquisitionsbyu s andnon u sacquirersofforeignbusinessesacquisitionvehicle corporate likestructuresincommonlawcountries e g u s sharecompaniesorlimitedliabilitycountriesincivillawnations e g china formofpayment generallycashformofacquisition shareacquisitionsgenerallysimplestpost closingorganization holdingcompanystructureiftargettobeoperatedasindependentunitorintegratedwithacquirer sexisting in country operationstaxstrategies highlycomplexandvarywithlocaltaxandlegaljurisdictions implementingcross bordertransactionsinemergingcountries poseschallengesnotcommontodevelopedcountriessuchaspoliticalandeconomicrisksincluding excessivelocalgovernmentregulation confiscatorytaxpolicies restrictionsoncashremittances currencyinconvertibility expropriationofforeignassets localcorruption andcivilwarandlocalinsurgenciesmanagingriskthroughinsurance e g opic worldbank andcontractoptions e g puts valuingcross bordertransactions methodologysimilartothatemployedwhenacquirerandtargetinsamecountrydiscountedcashflow i e convertingfuturecashflowstoapresentvalue relativevaluationmultiples i e purchasepriceasamultipleofthetargetfirm sannualrevenue basicdifferencesbetweenwithincountryandcross borderincludethefollowing needtoconverttargetcashflowprojectionsintoacquirerhomecountrycurrencyadjustingdiscountrate1forrisksuncommonin withincountry valuations e g political businessrisk exchangeraterisk 1thediscountrateisthecostofcapitalusedtoconvertfuturecashflowstoapresentvalue projectingfuturecurrencyexchangerates objective converttarget localcountry projectedcashflowsintoacquirer homecountry currencyhow predictforward futurespot exchangeratesbasedoninterestrateparity irp orpurchasingpowerparity ppp theoriesspotexchangerates thecurrentnumberofdollarsrequiredtobuyoneeuroforwardexchangerate therateatwhichabankiswillingtoexchangeonedollarforoneeuroatsomespecifiedfuturedateforwardexchangeratesaredeterminedbydifferencesbetweeninterestrates irp andprices ppp inthetwocountries interestrateparitytheory projectingtheforwarddollar euroexchangeratebasedonu s interestratescomparedtoeurozonecountryinterestrates n 0 1 r n n 1 r n n n 1 r n n 1 r n n x 0where n forward exchangeratenperiodsintothefuture 0 eurospotrater n interestrateinu s r n interestrateineuropeanunion projectingtheforwardeuro dollarexchangeratebasedoneurozonecountryinterestratescomparedtou s interestrates n 0 1 r n n 1 r n n n 1 r n n 1 r n n x 0where n forwardeuroexchangeratenperiodsintothefuture 0 euro spotrate 201220132014target seuro denominated 124 5 130 7 136 0fcffcashflows millions targetcountry sinterestrate 4 504 705 30u s interestrate 4 254 354 55currentspotrate 1 2044projectedspotrate 1 20151 19641 1788target sdollar denominated 149 59a 156 37 160 32fcffcashflows millions notes calculatingtheprojectedspotrateusinginterestrateparity 2012 1 0425 1 0450 x1 2044 1 2015 2013 1 0435 2 1 0470 2 x1 2044 1 1964 2014 1 0455 3 1 0530 3 x1 2044 1 1788 convertingeuro denominatedintodollar denominatedfreecashflowstothefirmusinginterestrateparitytheory a 149 59 124 5x1 2015 purchasingpowerparitytheory projectingtheforwarddollar pesoexchangeratebasedonu s pricelevelscomparedtomexicanpricelevels peso n peso 0 1 pus n 1 pmex n peso n 1 pus n 1 pmex n x peso 0where peso n forward pesoexchangeratenperiodsintothefuture peso 0 spot pesoexchangeratepus expectedu s inflationratepmex expectedmexicaninflationrate projectingtheforwardpeso dollarexchangeratebasedonmexicanpricelevelscomparedtou s pricelevels peso n peso 0 1 pmex n 1 pus n peso n 1 pmex n 1 pus n x peso 0where peso n forwardpeso exchangeratenperiodsintothefuture peso 0 spotpeso exchangerate 201220132014target speso denominatedp1 050 5p1 124 7p1 202 7fcffcashflows millionsofpesos mexicanexpectedinflationrate 6 u s expectedinflationrate 4 spotrate peso 0877projectedspotrate peso 0860 0844 0828target sdollar denominated 90 34a 94 92 99 58fcffcashflows millionsof notes calculatingtheprojectedspotrateusingpurchasingpowerparity 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 06 3 x 0877 0828a 90 34 p1 050 5x 0860 convertingpeso denominatedintodollardenominatedfreecashflowstothefirmusingpurchasingpowerparitytheory estimatingcostofequityfordevelopedcountries developedcountriesexhibitlittledifferencesincostofequitybecauseofgloballyintegratedcapitalmarkets therefore theglobalcapmcanbewrittenasfollows ke dev rf devfirm global rm rf fspwhereke dev requiredreturnonequityforafirminadevelopedcountryrf localcountry srisk freerateofreturnifcashflowsinlocalcurrencyoru s treasurybondrateifindollars devfirm global nondiversifiableriskforgloballydiversifiedportfolioorwell diversifiedportfoliohighlycorrelatedwiththeglobalportfolio rm rf differenceinexpectedreturnonglobalmarketportfolio u s equityindex orbroadlydefinedindexinthelocalcountryandtherffsp premiumsmallfirmsmustearntoattractinvestors keypoint whencapitalmarketsarefullyintegrated equityinvestorsholdgloballydiversifiedportfoliosandtheequitypremiumisthesameforallinvestorswhenmeasuredinthesamecurrency estimatingcostofequityforemergingcountries emergingcountriesmayexhibitsignificantdifferencesinthecostofequityduetosegmentedcapitalmarkets therefore thecapmmaybewrittenasfollows ke em rf emfirm global rcountry rf fsp crpwhererf localriskfreerateoru s treasurybondrateconvertedtoalocalnominalrateifcashflowsareinthelocalcurrency ifcashflowsindollars theu s treasuryrate rcountry rf differencebetweenexpectedreturnonabroadlydefinedequityindexinthelocalcountryorinasimilarcountryandtheriskfreerate emfirm global emergingcountryfirm sglobalbetacrp specificcountryriskpremiumexpressedasdifferencebetweenthelocalcountry s orasimilarcountry s governmentbondrateandtheu s treasurybondrateofthesamematurityfsp premiumsmallfirmsmustearntoattractinvestors keypoint foremergingcountries theequityriskpremiummaynotreflectalltheriskassociatedwithinvestinginthatcountryandthecostofequitymayhavetobeadjustedforsuchthingsaspoliticalrisk estimatingthecostofdebt fordevelopedcountries thetarget slocalortheacquirer shomecountrycostofdebt foremergingcountries thecostofdebt iemfirm isasfollows iemfirm rf crp frpwhererf riskfreerate seeprecedingslide crp specificcountryriskpremium seeprecedingslide frp firm sdefaultriskpremium i e additionalpremiumforsimilarfirmsratedbycreditratingagenciesorestimatedbycomparinginterestcoverageratiosusedbyratingagenciestothefirm sinterestcoverageratiostodeterminehowtheywouldratethefirm evaluatingemergingcountryriskusingscenarioplanning riskmaybeincorporatedintothevaluationbyconsideringalternativeeconomicscenariosfortheemergingcountry projectedcashflowsforalternativescenarioscouldreflectdifferentgdpgrowthrates inflationrates interestrates foreignexchangerates oralternativepoliticalconditions ifriskisincludedbycalculatingaweightedaverageofalternativescenarios thediscountrateshouldnotbeadjustedforspecificcountryrisk financialreturnstocross bordermergersandacquisitions combined excess financialreturns1 includingacquirerandtargetfirmshareholders inm atransactionsworldwideaverage15 ontheannouncementdate returnsmayvarywiththecharacteristicsofthedeal e g hostileversusfriendly mostofthecombinedfinancialreturnisearnedbytargetfirmshareholdersacquiringfirmshareholdersexperience excess financialreturnsof1to1 5 keypoint contrarytoconventionalwisdom acquisitionsonaveragecreatevalueforbothacquirerandtargetfirmshareholders 1excessfinancialreturnsarethoserealizedoverandabovewhatwouldhavebeenearnedhadnoacquisitionoccurred source jeffreynetter mikestegemoller andm babajidewintoki implicationsofdatascreensonmergerandacquisitionanalysis alargesamplestudyofmergersandacquisitionsfrom1992to2009 reviewoffinancialstudies 24 2011 pp 2242 2285 resultsreflect311 894transactionsbetween1992and2009 nestlebuyscontrollinginterestinchinesecandymaker casestudybackground acquirer nestlecorporation world slargestfoodcompany nestleoperatedinchinafor20yearsandcurrentlyhassalesof 3 3billionoperates23plantsandhas14 000employeesnestleintendstogrowemergingmarket sshareoftotalrevenuefromone thirdin2010to45 by2020target hsufuchi china slargestconfectionaryproductsmanufacturer 800millioninannualrevenueand 91millioninprofit6 6 marketshareandestablishednationwidedistributionnetworkandretailoutletchainhsufamilyandbaringprivateequityasiaown57 and15 ofshares respectively remainingsharesownedbynon foundingfamilyandnon institutionalshareholders so calledindependentshareholdersannouncementdate july11 2011sharestradedonsingaporestockexchangesellat21 discounttocomparablefirmshaveunderperformedpeersduringlastseveralyears dealcharacteristics nestleofferpriceequivalentto 1 7billionu s dollarsfora60 ownershipstake whichrepresented3 3timeshsufuchi sannualrevenuenestletobuy43 6 offirm ssharesfromindependentshareholdersfor4 35singaporedollars equivalentto3 65u s dollars anda16 5 stakefromthehsufoundingfamily thepurchasepricerepresenteda24 premiumoverthe6monthsendingonjuly1 2011 hsufuchi scurrentceoandchairmanwouldcontinuetomanagethefirm potentialsynergies fromnestl sperspective increasesexposuretochina sfastgrowingconsumermarketprovidesaplatformforfutureacquisitionsinthefoodindustryinchinahsufuchi sestablishednationaldistributionnetworkandchainofretailoutletsprovidesbarriertoentryforpotentialcompetitorsfromhsufuchi sperspective enablesbothhsufamilyandindependentshareholdersto cashout ofaportionoftheirinvestmentprovidesresourcesforpotentialinternationalexpansionprovidesglobalbrandanddistributionnetworktosupportinternationalexpansion comparablevaluationmultiples nestlepaid3 3timeshsufuchi s2010annualrevenuecomparabletransactionmultiples u s basedkraftfoodspaid2 4timesrevenueforbritishcandymaker cadbury in2010u s basedmarscandycompanyacquiredu s gummanufacturerwrigleycorporationfor4 2timesrevenuein2008frenc