INTERNATIONAL CORPORATE FINANCE The subject matter of this paper is to discuss the costs and benefits of cross-border takeover merger and acquisition (M&A).
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INTERNATIONAL CORPORATE FINANCE MERGER & ACQUISITION Introduction The subject matter of this paper is to discuss the costs and benefits of cross-border takeover merger and acquisition (M&A). But first some definitions. An acquisition is where the acquirer subsumes the target company, thus becoming one legal entity. On the other hand, a merger, extinguishes the identity of both participants, creating a new company. Cross-border M&A is the international dimension of this. The main theory of merger and acquisition is synergy, that is, one and one makes three. Through synergy, managers create greater value with the integration of two companies, rather than that of their individual parts. Costs and Benefits Costs In a study conducted by Francis Breedon and Francesca Fornasari, 2000, (FX impact of cross-border merger ) they found that the value of the target firm appreciated by 1%, while there was a relative deterioration of the acquirer's value. More specifically, the report found that, in the period immediately after the deal is announced, there is generally a strong upward movement in the target corporation's domestic value (relative to the acquirer's currency). Fifty days after the announcement, the target value is then, on average, 1% stronger. However, the study found that this currency impact tends to peak at approximately 5%. (Lien, K (2005) 'Mergers And Acquisitions - Another Tool For Traders', 12th October, www.investopedia.com/university/mergers ) Although there are many factors that may be impacting value at the time, the announcement of a large M&A deal can have a meaningful impact on the pair's price action. For example, in Figure 1, the announcement by Procter & Gamble of a 77% acquisition of Wella AG for US$4.5 billion, saw the EUR/USD jump over 100 pips, followed by a 200 pips' rise the following week. Another example of a large cross-border transaction having an impact on the currency market is Great West Life's acquisition of Canadian Life for US$4.7 billion.
But, the normal prediction is that, if that power is used to increase price, sales will fall. Diversification - some commentators observe that company diversification is of no value to shareholders as they can do so more cheaply on their own accounts. But, others hypothesize that international risk diversification could be a motive for cross-border mergers. However, if international capital markets are perfectly integrated and efficient, with rational investors, then no diversification gains can be generated from international merger activity. But, according to some empirical work, diversifying mergers reduce shareholder wealth. (Hopkins, H.D, (1999) Cross-border Merger and Acquisitions: A Global and regional perspective, Journal of International Management, Vol.5, Issue 3, pp. 207-239) General Principles So, mergers that increase the efficiency of the merging firms should increase both their profits and their sales. Mergers that increase market power should increase profits and reduce sales. A merger which reduces efficiency is likely to reduce both profitability and sales. (Gugler, K, Mueller, D.C (2003) The effects of Mergers: an international comparison, International Journal of Industrial Organisation, Vol.21, Issue 5, pp. 625-653) Managers have been heard to comment that cost reductions are the major benefits that are most likely to be achieved, whereas, the achievement of synergy is highly uncertain. For instance, the acquisition of Miller Beer by Philip Morris, where Philip Morris applied their strengths in marketing cigarettes to the brewing industry, which had previously emphasised production. In the process, they were able to improve Miller's market position from number seven to number two. However, in a recent book by Mark Sirower (Sirower , M (1997) The Synergy Trap: How Companies Lose the Acquisition Game, p. 14), the author argues that synergy rarely justifies the premium paid. Sirower observes, 'Many acquisition premiums require performance improvements that are virtually impossible to realize even for the best managers in the best of industry conditions'. He further argues that the net present value of an acquisition can be modelled as: NPV = Synergy - Premium And that firms that don't realise this and don't realise that synergy almost never justify the premium paid.
However, there is some evidence that related acquisitions and cross-border acquisitions do add value. Broadly speaking, mergers and acquisitions often seem to fail. But this depends on how failure is defined. In the extreme case, if failure is assessed as the sale or liquidation of the business, then the rate of failure is relatively low. On the other hand, if failure is the lack of attainment of management's financial objectives, then the rate of failure is high. Based on his experience, Joseph Miller, (Senior Vice-President and Chief Technology Officer of DuPont) offered the following explanation for failure of some deals: 'In the case of [failure], it was an acquisition that was driven by the corporation and not supported by the business [strategic business unit] ... and in the case of one that worked, there was total alignment and support from the corporation and from the business.' (Avi Aden, Vice-Chair of Vishay Intertechnology, a Pennsylvania-based high-tech enterprise, 'We will not buy a company that we cannot improve... . Our goal is to look at a company that's either in trouble or not doing as well as we think it can do and then take decisive steps very quickly to improve it.') Anthony Ruys states that mergers and acquisitions are not only good for some businesses, but possibly essential, if they are focused and support the core business. He says: 'Of course we make acquisitions when they are strategic. A strategic acquisition can be one that gives you real leadership in one or more countries simultaneously. If you already have a healthy export position in a market, and you get the chance of buying the number one in that market, and that number one has a brand that is also healthy in its own right, that's a smart acquisition.' (Anthony Ruys, in an interview with Hans Smits, on the acquisition of Murphy's, now an important part of the Heineken 'family'.) Therefore, the success of mergers depends on how realistic the dealmakers are when negotiating and how well they can integrate two companies, while maintaining day-to-day operations. (www.investopedia.
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