Europe is moving toward a common market Globalization and increased intensity of international competition Rapid technological change Consolidation of major industries Forces Driving Cross Border Mergers

1. International Takeovers and Restructuring

2. • Main reasons for large increase in
foreign M&A activity
– Europe is moving toward a common market
– Globalization and increased intensity of
international competition
– Rapid technological change
– Consolidation of major industries

3. • Major reasons for cross border
transactions
– Combine complementary capabilities
– Strengthen distribution networks
– Achieve critical mass required for new
approaches to R&D, production, etc.
• Industry characteristics related to M&A
pressures
– Telecommunications
• Technological change
• Deregulation
• Efforts to develop a global presence

4. Forces Driving Cross Border
Mergers
• Growth
– Most important motive
– U.S. highly regarded by foreign markets
– U.S. firms have looked abroad to countries in
relatively earlier faster-growing stages of life
cycle — especially U.S. food companies
– Enable medium-sized firms to attain size
necessary to improve their competitiveness
– Achieve size necessary for economies of scale;
for effective global competition

5. • Technology
– Impact on international mergers
• Technologically superior firm may exploit its
technological advantage worldwide
• Technologically inferior firm may acquire
technologically superior target to enhance competitive
position
– Technological superiority tends to be more
portable
• No cultural baggage
• Acquirer may select technologically inferior target —
improve target competitive position and profitability
• Buy into foreign markets to exploit their technological
knowledge advantage

6. • Value increasing acquisitions
– Acquiring firm may have an advantage in
general management functions such as
planning and control or research and
development
– Specific management functions such as
marketing or labor relations tend to be
environment specific
• Not readily transferable
• May explain predominance of U.K. and Canada
as international merger partners of U.S.

7. • Extend advantages in differentiated
products
– Strong correlation between
multinationalization and product
differentiation
– Firms that have developed a reputation for
superior products in domestic market may
also find acceptance for their products in
foreign markets

8. • Roll-ups — combine firms in fragmented
industries
• Consolidation — adjust to worldwide
excess capacity
• Government policy
– Circumvent tariffs and quotas on imports or exports
– Avoid restrictions that may protect a large lucrative
market
– Environmental and other regulations can increase
cost of building de novo facilities
– Response to changes in government policy and
regulations

9. • Exchange rates
– Affect prices of foreign acquisitions, cost of
doing business abroad
– Affect value of repatriated profits to the
parent
– Exchange rate risk management becomes
important

10. • Political/Economic stability
– Can alleviate or exacerbate higher risks
inherent in operating abroad
– Political factors
• Changes in administrations in power
• Likelihood of government intervention
• Risk of expropriation
• War vs. peace

11. – Economic factors
• Low or at least predictable inflation
• Labor relations climate
• Stability of exchange rates
• Depth and breadth of financial markets
• Transportation and communications networks
– U.S. market attractive to foreign investors
in terms of political/economic factors

12. • To follow clients
– Importance of long-term client relationships
– Example: Financial firms expand abroad to
retain clients who have expanded abroad
• Diversification
– Provide diversification
• Product line
• Geographically
– Systematic risk reduction possible if world
economies are not perfectly correlated

13. International Joint Ventures
• Advantages
– May be only feasible method of obtaining
raw materials
– May involve different capabilities and link
together complementary skills
– Local partners may reduce risks involved in
operating in foreign country
– May be necessary to overcome foreign
government restrictions

14. – May enhance advantages found in
domestic joint ventures such as economies
of scale and may provide basis for faster
growth rate
– Knowledge acquisition potentials can be
substantial
• Disadvantages
– Provide information which makes partner a
future competitor
– Different cultures may increase tensions
normally found in joint ventures

15. • Principles for management of successful
collaborations
– Should involve complementary capabilities
– Contracts should make it easy to terminate
relationship
– Control and ultimate decision makers should
be specified
– Formulate terms under which one company
can buy out other
– Activities and information flows should be tied
into normal communications structures

16. – Criteria for evaluation of performance
should be defined
– Allocation of rewards and responsibilities
under different types of outcomes should
be considered