,Multinational Restructuring,16,Chapter,South-Western/Thomson Learning 2003,See c15.xls for spreadsheets to accompany this chapter.,Chapter Objectives,To introduce international acquisitions by MNCs as a form of multinational restructuring; To explain how MNCs conduct valuations of foreign target firms; To explain why the valuations of a target firm may vary among MNCs; and To identify other methods of multinational restructuring.,Multinational Restructuring,Building a new subsidiary, acquiring a company, selling an existing subsidiary, downsizing operations, or shifting production among subsidiaries, are all forms of multinational restructuring. MNCs continually assess possible forms of multinational restructuring to capitalize on changing economic, political, and industrial conditions across countries.,What are the economic, political, and industrial changes for various countries?,Online Application,Consult the Country Commercial Guides prepared by embassy staff at http:/www.usatrade.gov/website/ccg.nsf/ccghomepage?openform.,Refer to the CIAs World Factbook at http:/www.odci.gov/.,International Acquisitions,Through an international acquisition, a firm can immediately expand its international business since the target is already in place, and benefit from already-established customer relationships. However, establishing a new subsidiary usually costs less, and there will not be a need to integrate the parent management style with that of the acquired company.,Value of International Acquisitions,Value of International Acquisitions,Like any other long-term project, capital budgeting analysis can be used to determine whether a firm should be acquired. Hence, the acquisition decision can be based on a comparison of the benefits and costs as measured by the net present value (NPV).,International Acquisitions,NPV = initial outlay n + S cash flow in period t t =1 (1 + k )t + salvage value (1 + k )n k = the acquisitions required rate of return n = the lifetime of the acquired firm If NPV 0, the firm can be acquired.,International Acquisitions,Note that the relevant exchange rate, taxes, and blocked-funds restriction, should be taken into account. The cost of overcoming the barriers that may be imposed by the government agencies that monitor mergers and acquisitions should be taken into consideration too.,International Acquisitions,Examples of such barriers include laws against hostile takeovers, restricted foreign majority ownership, “red tape,” and special requirements.,International Acquisitions,In the U.S., mergers and acquisitions are monitored by two agencies:,Online Application,Department of Justice (Antitrust Division) http:/www.usdoj.gov/atr/ Federal Trade Commission http:/www.ftc.gov/,While the Asian crisis had devastating effects, it created an opportunity for some MNCs to pursue new business in Asia. In Asia, property values had declined, the currencies were weakened, many firms were near bankruptcy, and the governments wanted to resolve the crisis. However, these MNCs must not ignore the lowered economic growth in Asia too.,International Acquisitions,In Europe, the adoption of the euro as the local currency by several countries simplifies the analysis that an MNC has to perform when comparing various possible target firms in the participating countries.,International Acquisitions,For news and comments on recent international mergers and acquisitions, check out: http:/surveys.ft.com/intmergers2001/ http:/www.mergerstat.com/,Online Application,Factors that Affect the Expected Cash Flows of the Foreign Target,Target-Specific Factors Targets previous cash flows. These may serve as an initial base from which future cash flows can be estimated. Managerial talent of the target. The acquiring firm may allow the acquired firm to be managed as it was before the acquisition, downsize the firm, or restructure its operations.,Country-Specific Factors Targets local economic conditions. Demand is likely to be higher when the economic conditions are strong. Targets local political conditions. Cash flow shocks are less likely when the political conditions are favorable.,Factors that Affect the Expected Cash Flows of the Foreign Target,Targets currency conditions. A currency that is expected to strengthen over time will usually be preferred.,Factors that Affect the Expected Cash Flows of the Foreign Target,Targets industry conditions. Industries with high growth potential and non-excessive competition are preferred.,Country-Specific Factors,Taxes applicable to the target. What matters to the acquiring firm is the after-tax cash flows that it will ultimately receive in the form of remitted funds.,Factors that Affect the Expected Cash Flows of the Foreign Target,Targets local stock market conditions. When the local stock market prices are generally low, the targets acceptable bid price is also likely to be low.,Country-Specific Factors,The Valuation Process,Prospective targets are first screened