Global Mergers and Acquisitions

Abdol S. Soofi, Yuqin Zhang

• Publisher: Business Expert Press
• Year: 2018
• Print ISBN: 9781947098701
• eBook ISBN: 9781947098817
• Edition: 2
• Topic: Business
• Subtopic: Finance
• Index: Business

This book primarily deals with corporate restructuring through mergers and acquisitions (M&As). It critically examines all functions that must be performed in completing an M&A transaction. Domestic and crossborder M&A's are very similar in many respects even though differences between them also exist. The book includes discussions of international finance and multinational financial management–the topics that arise in cross-border M&A transactions.

Given the increasing importance of China as the second largest economy in the world and Chinese companies' growing merger and acquisition (M&A) activities globally, we devote the last two chapters of the book to China's outward foreign direct investment and cross-border M&A activities. Moreover, the second volume includes the case studies regarding Chinese foreign direct investment both in Greenfield and acquisition forms give additional insights into challenging tasks of due diligence and post-merger cultural integration that foreign investors face.

The M&A literature is a fragmented field of inquiry. This book brings together important, practical insights from this vast literature in a short, but cohesive form that has high managerial relevance.

PART I

Cross-Border Mergers, Acquisitions, and Corporate Restructuring

CHAPTER 1

Internationalization of Economies

Among all factors affecting businesses, internationalization or globalization of the economies has been found having the most profound impact on private business management since the World War II. Of course, cross-border mergers and acquisitions (M&As) is an essential component of the internationalization or integration of diverse economic systems. Accordingly, it is pivotally important to have a clear understanding of the internationalization of the economies. We elaborate this critical concept, in this introductory chapter, by examining the constituent parts of the internationalization process.

Internationalization of Product and Service Markets

It is common to use the sum of exportsand importsof goods and services as a percentage of the gross domestic product (GDP) of a country as a measure of the openness of the economy. Using this indicator of the openness of the economy is common even though capital flows across the borders, as well as global currency transactions, are considered the other leading indicator of globalization. According to this index, a rapid rise in international trade has occurred around the globe since World War II. Nevertheless, as Table 1.1 shows, the size of the two-way trade as a percentage of the GDP of the world and groups of the countries has remained relatively stable during 2005 to 2015. We present values of the exports plus imports of goods and services as percentages of GDPs by types of economies since 2005 in Table 1.1.

As can be seen from Table 1.1, the overall degree of openness for all economies shows a little over 1 percent increase during 2005 to 2015. During the same time, the two-way trade, as a fraction of the GDP of the developing countries, has decreased by almost 9 percent. The value of exports plus imports as a percentage of the GDP of the transition economies has declined by 5 percent. Finally, the ratio for the developed economies has experienced a 4 percent growth.

Table 1.1 Openness of the economies: Exports plus imports as a percentage of the GDP 2005 to 2015

Year	World	Developing economies	Transition economies	Developed economies
2005	26.98	38.86	38.07	22.88
2006	28.78	39.67	36.93	24.50
2007	29.69	38.92	34.08	25.93
2008	31.06	39.53	35.71	27.20
2009	26.23	32.50	31.77	23.20
2010	28.56	34.19	33.12	25.43
2011	30.51	35.67	33.40	27.43
2012	30.29	35.15	32.34	27.24
2013	30.40	34.15	30.98	27.97
2014	30.24	33.10	32.01	28.27
2015	28.39	30.13	32.81	27.03

Note: The authors calculated the percentages.
Source: UNCTAD Stat (2017).

To gain a better overall view of the global international trade, we present Figure 1.1, which shows the index of the value of exports calculated by the chain method.¹ The index shows that after rising to 121.7 in 2004, the value of trade dropped precipitously during the global financial crisis (The Great Recession) of 2007 to 2009 to 77.4 points in 2009, and again increasing to near its peak in 2011. The index shows the value of the exports in 2016 was 96.6, which is a little less than its value of 98.9 in 1981. These figures imply that despite an extensive fluctuation, the value of the global exports in 2015 remains roughly at the same 1981 level.

The world trade-in services has increased rapidly over the last several decades. The commercial services data indicate that between 2000 and 2016, the value of all commercial service exports increased from $1,491 billion to $4,807.69 billion, an increase of 222.4 percent. Furthermore, the value of imported commercial services worldwide rose from $1,463.8 billion to $4,694.09 billion during the same period (World Trade Organization 2013).²

Figure 1.1 Value index of exports

Source: World Trade Organization (2017).

Internationalization of Financial Markets

An important contributing factor to the rapid internationalization process over the last three decades is the removal of restrictions on capital flows across the national borders of many countries. With the removal of the restrictions on capital flows, the sum of the value of equity markets’ capitalization, corporate and public bonds, and loans globally has increased from 0.5 trillion dollars in 1980 to 11.9 trillion in 2007. Since then, however, the financial flows have plummeted to half of its peak value or 5.2 trillion dollars in 2014 (McKinsey Global Institute 2016).

International Transfers of Technology

International transfer of technology has increased through cross-border licensing agreements, cross-border M&As, joint ventures, foreign direct investment in wholly foreign-owned enterprises, and joint research and development (R&D) activities of multinational enterprises.

Internationalization of National Enterprises

An important aspect of internationalization of national enterprises, which began in the late 19th century and accelerated in the 20th century, is global operations of what Alfred Chandler, Jr. (1984) called integrated industrial enterprises. The first step in the development of integrated international enterprises was the formation of an administrative organization. Chandler best described the pattern of development of these industrial enterprises and creation of the administrative organization:

It was essential first to recruit a team to supervise the process of production, then to build a national and very often international sales network, and finally to set up a corporate office of middle and top managers to integrate and coordinate the two. Only then did the enterprise become multinational. Investment in production abroad followed, almost never preceded, the building of an overseas marketing network. (Chandler Jr. 1984, 491–492)

Multinational enterprises can fall into one of the two categories: multidomestic and global. The multidomestic enterprises operate on stand-alone, country-centered management strategy. The enterprise is present in many countries, but competes on a country-by-count...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Preface to the First Edition
• Preface to the Second Edition
• Acknowledgments
• Introduction
• Part I Cross-Border Mergers, Acquisitions, and Corporate Restructuring
• Chapter 1 Internationalization of Economies
• Chapter 2 Mergers and Acquisitions and Corporate Restructuring
• Chapter 3 An Overview of the Merger and Acquisition Process
• Chapter 4 Merger and Acquisition Strategy Development
• Chapter 5 Selecting a Potential Target Company for Acquisition
• Chapter 6 Accounting for Mergers and Acquisitions
• Chapter 7 Alternative Approaches to Valuation
• Chapter 8 Cost of Capital
• Chapter 9 Real Option Analysis in Valuation of a Company
• Chapter 10 Valuation of the Target Company Using the Black–Scholes Model
• Chapter 11 Target Valuation in Cross-Border Mergers and Acquisitions
• Chapter 12 Negotiations, Deal Structuring, Financing, and Regulatory Considerations
• Chapter 13 Postmerger Integration and Reorganization
• Notes
• References
• Index