International investment topic cross – border MAS

In friendly M&As, the board of a target firm agrees to the transaction.. This does not excludethe possibility that, initially, the management of the target firm was against thetransactio

FACULTY OF INTERNATIONAL BUSINESS AND ECONOMICS

International Investment

Course: INE4002-E 1 Instructor: PhD Nguyen Thi Kim Anh Students: Vũ Thùy Linh - 18050509 Nguyễn Thu Trang - 18050611 Nguyễn Thảo Ly - 18050515Topic: Cross – border M&As

Hanoi, 2021

Table of contents

1 Concept, taxonomy of cross-border M&A 2

1.1 Concept 2

1.2 Taxonomy of cross-border M&A 2

2 Trends of Global M&A by industry, group of economies, region, country: 3

2.1 M&A trends in the world 7

2.2 Trends of M&A by region 8

2.3 M&A trends in industries 10

3 Advantages and Disadvantages of Cross-border M&A from the viewpoint of Foreign investors/ host governments 12

3.1 Foreign investors viewpoint 12

3.2 Host government viewpoint 15

4 Why does the host government control FDI in the form of M&A? 18

1 Concept, taxonomy of cross-border M&A

In a cross-border acquisition, the control of assets and operations is transferredfrom a local to a foreign company The local firm becomes an affiliate of theforeign

1.2 Taxonomy of cross-border M&A

Cross-border M&As can be divide by functionally

Horizontal M&As is the merger of two or more companies that occupy similar

levels in the production supply chain It may happened between competing firms inthe same industry Consolidating resources allows companies to expand theirmarket share and cut costs with synergies (the value of their combined assetsexceeds the sum of their assets taken separately) Typical industries in which suchM&As occur are pharmaceuticals, automobiles, petroleum, and several servicesindustries

Vertical M&As (between firms in client-supplier or buyer-seller relationships).

Typically, they seek to reduce uncertainty and transaction costs as regards forwardand backward linkages in the production chain and to benefit from economies ofscope M&As between parts and components makers and their clients (such as finalelectronics or automobile manufacturers) are good examples

Conglomerate M&As (between companies in unrelated activities) They seek

to diversify risk and deepen economies of scope

Source UNTAD WIR 2000

Cross-border M&As may also be classified differently

M&As can be driven primarily by short-term financial gains, rather thanstrategic or economic motivations such as the search for efficiency Typicalexamples include deals where buyout firms and venture capital companies acquireother firms

Friendly M&As can be distinguished from those that are hostile In friendly

M&As, the board of a target firm agrees to the transaction (This does not excludethe possibility that, initially, the management of the target firm was against thetransaction)

Hostile M&As, “Hostile M&As are undertaken against the wishes of the target firms, id est, the boards of the latter reject takeover/ merger offers Regardless of whether hostile M&As involve bidding by several prospective

acquirers, the price premium tends to be higher than in friendly transaction”.

(UNCTAD 2000)

Characteristics of Hostile M&As

One of the characteristic results of hostile M&A is taking control over acompany without the consent of the current board This process is known at foreignmarkets since the 1970s – especially at the American and British markets, whichare characterized by well-developed market economy sector Hostile takeoversintensify especially when a situation of a company, which can be a target of ahostile takeover, is characterized by:

– Dispersion of shares

– Dispersion of shares; domination of single, private shareholder

– Dispersion of shares; poor management, which results in its inefficiency – Dispersion of shares; undervaluation of share price (which can be a result

of bad management)

– Dispersion of shares; low level of debt and/or high level of liquid assets Apart from the internal situation of a company, institutional environment of acompany may be also conductive to the threat of hostile takeover Among the mostimportant elements are:

– Dispersion of shares; liberal government policy concerning processes ofcapital concentration

– Dispersion of shares; no cultural barriers that are especially present incountries characterized by strong devotion to family property [4]

Solution

There are several defenses that the management of the target company canemploy to deter a hostile takeover They include the following:

Poison pill: Making the stocks of the target company less attractive by

allowing current shareholders of the target company to purchase new shares at adiscount This will dilute the equity interest represented by each share and, thus,increase the number of shares the acquirer company needs to buy in order to obtain

a controlling interest The hope is that by making the acquisition more difficult andmore expensive, the would-be acquirer will abandon their takeover attempt

“Poison pills are used by companies that fear hostile takeovers to ensure that a bid,

if successful, will trigger events that will significantly reduce the value of the firm.For instance, flip-in poison pills allow all existing holders of target company shares

to buy additional shares at a bargain price Flip over poison pills allow holders ofcommon stock to buy (or holders of preferred stock to convert into) the acquirer’sshares at a bargain price This defence measure has been installed in manycompanies, in particular United States companies Although it is not certain howmuch poison pills alone have contributed to the low number of hostile takeovers,they have forced raiders to negotiate with the board of target firms to agree to a fairmarket price for the acquired firms’ shares” (UNCTAD 2000)

Staggered Board of Directors: A staggered board is a board that consists of

directors grouped into classes who serve terms of different lengths A typicalstaggered board has three to five classes of positions on the board, each carryingterms of service that vary in length, allowing for a staggering of elections Duringeach election term, only one class of positions are open to new members, therebystaggering the number of openings available within the board directorship at anyone time This helps former board members (the acquired company) continued tostay and active in the company for a while and prevent the acquiring company fromachieving This method is combined with "poison pill" creates a very effectivedefense system against hostile M&A [6]

White knight: In case of defense against a hostile takeover, there is another

interesting strategy involving the intervention of “white knight” called white knight

strategy “White knight” is a company which helps a company which is a target of

a takeover by buying its shares without any intention of acting against its board.Transaction of buying shares is made with consent of the board of acquiredcompany on favorable conditions At the moment of taking control over controllinginterest, “white knight” makes a hostile takeover impossible After getting controlover a company there are no personal changes and the current board maintains itspower and control over a company, as was arranged earlier Searching for “whiteknight” is making friendly investors offers of buying shares These friendlyinvestors are most frequently companies from the same business Such actions aretreated as a last resort for attacked companies and they are very rare [4]

Crown Jewel: Acquired companies sell out their most value assets to make

the acquiring company can’t see benefits from them If this method fail, it coulddamage the acquired company values [6]

Treasury Stock: This is a common defense when acquired companies using

money to buy their own stock to increase the dominance holding rate [6]

Pac-man defence: Acquired companies go back to acquiring companies thatwant to acquire them Clearly, this is a very dangerous game to play since theacquired companies could end up paying a very high premium for the others stock.This method is rarely available use due to low feasibility [6]

Jonestown Defense: This is the most negative defense method, named after

a tragedy that struck Jonestown (Guyna) when a denomination committed suicide

to maintain its autonomy With this approach, the company came up with the mostextreme of the aforementioned methods like selling its valuable property at a cheapprice to everyone (except for the companies are looking to take over them) orborrowing large loans which is unnecessarily expensive Even if Jonestown method

is successful, it will also push the company to the brink of bankruptcy or leavelong-term negative consequences for the company [6]

2.1 M&A trends in the world

Value of mergers and acquisitions (M&A) worldwide from 1985 to 2020 (inbillion U.S dollars)

Source: Statista

The value of M&A deals globally has risen over the past few decades andtends to mirror the state of the economy overall Dips can be seen in the yearsduring and following a recession, and M&A activity increases in periods ofeconomic growth During the period of 5 years, from 2013 to 2018, there was aremarkable increase in the number of Global M&As deals in the world, from 38918deals in 2013 to 52626 in 2018 with the value of 2536 billion USD and 4127 billionUSD respectively In 2019, about 47000 M&A deals were announced Thisrepresented a decrease of 12% compared to 2018 The known value of thetransaction reached 3.5 trillion USD Compared to 2018, this declined even further

by 14% The COVID-19 crisis cause a dramatic fall in 2020, the value of global

M&A deals this year was amounted to 2.8 trillion USD, down from 3.5 trillionUSD in the previous year.

2.2 Trends of M&A by region

*In Europe.

Source: IMAA

Amid sluggish Eurozone growth and Brexit, the number of deals in 2019 wasdown 17456 transactions, 10% decline compared to 2018 Value of transactionsslumped to 888 billion USD In 2020 the number of deals was down to 14572transactions and the value of transactions slumped to 691,73 billion USD

Some announced big transactions include:

In 2016, M&A between Bayer and Monsanto was made for 49.75 billionEUR Bayer AG is a German multinational pharmaceutical and life sciencescompany and one of the largest pharmaceutical companies in the world TheMonsanto Company was an American agrochemical and agricultural biotechnologycorporation It was acquired by Bayer as part of its crop science division

In the same year, M&A between British American Tobacco and ReynoldsAmerican was made for 45.06 billion EUR This is British American Tobacco’slargest acquisition.

*In North America.

Source: IMAA

North America has been still by far the largest international market in theworld with value transactions The number of deals in 2020 was up to 17,713 andthe value of M&A deals amounted to 1.183 billion USD

One of the biggest deals in 2018 is Walt Disney merged with 21st CenturyFox Inc for 84.2 billion USD On July 27, 2018, 21st Century Fox shareholdersagreed to sell the majority of its assets to Disney for $71.3 billion Disney'sacquisition of 21CF was closed on March 20 after which the remaining 21CF'sassets were scattered across the divisions of Disney

In 2019 Bristol-Myers kicks off the 2019 M&A season with a 74billion dealwith Celgene Corporation Upon completion of the acquisition, pursuant to theterms of the merger agreement, Celgene became a wholly-owned subsidiary ofBristol-Myers Squibb Company

*In Asia- Pacific.

Source: IMAA

In Asia- Pacific, the transactions declined from 15000 deals in 2019 to 9982 in

2020, value decreased to 744 billion USD

Some announced big transactions include:

In 2014 CITIC Pacific Ltd from Hongkong made an acquisition with CITICLtd China for 42.2 billion USD

In 2015 China Tower Corp Ltd made an acquisition with China-Telecommuntower for 18.3 billion USD

2.3 M&A trends in industries

Automobiles, pharmaceuticals and chemicals, and food, beverages, andtobacco were the leading industries in the manufacturing sector in terms ofworldwide cross-border M&A activity Most M&As in those industries werehorizontal, aiming at economies of scale, technological synergies, increasingmarket power, eliminating excess capacity, or consolidating and streamlininginnovation strategies and R&D budgets In most of the industries in whichhorizontal M&A activity is strong, concentration ratios have intensified

In automobiles, M&A activity Telecommunications, energy and financialservices were the leading industries in M&A activity in the services sector, largely

as a result of recent deregulation and liberalization in these industries In financialservices, competitive pressures and mounting information technology costs havegiven an added impetus to M&A between carmakers and suppliers has also led togreater vertical consolidation

Over the past two decades, across the world many governments have removedlegal and regulatory barriers to financial industry consolidation Technologicalchange has facilitated financial globalization and promoted cross-border M&Aactivity And international accounting standards have ensured transparency in thepricing of financial services The important characteristics of financial deregulationhave been the dismantling of interest rate controls, the removal of barriers betweenbanks and other financial intermediaries and the lowering of entry barriers This hasled to disintermediation, investors demanding higher returns, price competition,reduced margins, falling spreads and competition across geographies, forcing banks

to look for new ways to boost revenues

3 Advantages and Disadvantages of Cross-border M&A from the viewpoint of Foreign investors/ host governments

3.1 Foreign investors viewpoint.

For the latecomer, M&A is a way to catch up rapidly Enhanced competitionand shorter product life cycles accentuate the necessity for firms to respond quickly

to opportunities in the economic environment, preferably before competitors move.Positions in new markets: Cross-border M&As often represent the fastestmeans of building up a strong position in a new market, gaining market power, andindeed market dominance increasing the size of the firm or spreading risks

The search for new markets and market power is a constant concern for firms.High transaction costs also associated with arm’s-length transactions involvingintangible assets may explain why firms possessing ownership-specific capabilitiesoften prefer to exert direct control (instead of exporting or licensing) whenexploiting them in new geographical locations or industry segments

Through M&As, firms can quickly access new market opportunities anddevelop critical mass without adding additional capacity to an industry By takingover an existing company, immediate access to a local network of suppliers, clients,and skills can be obtained

M&A provides a wider range of services or products that can be explored.This helps a business in diversifying their assets, protecting the bottom line againstunforeseen circumstances