Exam 18: Cross-Border Mergers and Acquisitions: Analysis and Valuation

Greenfield operations represent an appropriate entry if which of the following is true?

Bonds of a non-U.S.issuer registered with the SEC for sale in the U.S.public bond markets are called "Yankee" bonds.

Employees receive far greater legal protection in many developed foreign countries than they do in the U.S.

Arbitrage should drive the prices in different markets to be the same,as investors sell those assets that are undervalued to buy those that are overvalued.

InBev Buys An American Icon for $52 Billion For many Americans, Budweiser is synonymous with American beer, and American beer is synonymous with Anheuser-Busch. Ownership of the American icon changed hands on July 14, 2008, when beer giant Anheuser Busch agreed to be acquired by Belgian brewer InBev for $52 billion in an all-cash deal. The combined firms would have annual revenue of about $36 billion and control about 25 percent of the global beer market and 40 percent of the U.S. market. The purchase is the largest in a wave of consolidation in the global beer industry, reflecting an attempt to offset rising commodity costs by achieving greater scale and purchasing power. While expecting to generate annual cost savings of about $1.5 billion, InBev stated publicly that the transaction is more about the two firms being complementary rather than overlapping. The announcement marked a reversal from AB's position the previous week when it said publicly that the InBev offer undervalued the firm and subsequently sued InBev for "misleading statements" it had allegedly made about the strength of its financing. To court public support, AB publicized its history as a major benefactor in its hometown area (St. Louis, Missouri). The firm also argued that its own long-term business plan would create more shareholder value than the proposed deal. AB also investigated the possibility of acquiring the half of Grupo Modelo, the Mexican brewer of Corona beer that it did not already own to make the transaction too expensive for InBev. While it publicly professed to want a friendly transaction, InBev wasted no time in turning up the heat. The firm launched a campaign to remove Anheuser's board and replace it with its own slate of candidates, including a Busch family member. However, AB was under substantial pressure from major investors to agree to the deal, since the firm's stock had been lackluster during the preceding several years. In an effort to gain additional shareholder support, InBev raised its initial $65 bid to $70. To eliminate concerns over its ability to finance the deal, InBev agreed to fully document its credit sources rather than rely on the more traditional but less certain credit commitment letters. In an effort to placate AB's board, management, and the myriad politicians who railed against the proposed transaction, InBev agreed to name the new firm Anheuser-Busch InBev and keep Budweiser as the new firm's flagship brand and St. Louis as its North American headquarters. In addition, AB would be given two seats on the board, including August A. Busch IV, AB's CEO and patriarch of the firm's founding family. InBev also announced that AB's 12 U.S. breweries would remain open. By the end of 2010, the combined firms seemed to be progressing well, with the debt accumulated as a result of the takeover being paid off faster than planned. Earnings per share exceeded investor expectations. The sluggish growth in the U.S. market was offset by increased sales in Latin America. Challenges remain, however, since AB Inbev still must demonstrate that it can restore growth in the U.S. ^{Schultes, 2010} : -Why would the annual cost savings not be realized until the end of the third year?

InBev Buys An American Icon for $52 Billion For many Americans, Budweiser is synonymous with American beer, and American beer is synonymous with Anheuser-Busch. Ownership of the American icon changed hands on July 14, 2008, when beer giant Anheuser Busch agreed to be acquired by Belgian brewer InBev for $52 billion in an all-cash deal. The combined firms would have annual revenue of about $36 billion and control about 25 percent of the global beer market and 40 percent of the U.S. market. The purchase is the largest in a wave of consolidation in the global beer industry, reflecting an attempt to offset rising commodity costs by achieving greater scale and purchasing power. While expecting to generate annual cost savings of about $1.5 billion, InBev stated publicly that the transaction is more about the two firms being complementary rather than overlapping. The announcement marked a reversal from AB's position the previous week when it said publicly that the InBev offer undervalued the firm and subsequently sued InBev for "misleading statements" it had allegedly made about the strength of its financing. To court public support, AB publicized its history as a major benefactor in its hometown area (St. Louis, Missouri). The firm also argued that its own long-term business plan would create more shareholder value than the proposed deal. AB also investigated the possibility of acquiring the half of Grupo Modelo, the Mexican brewer of Corona beer that it did not already own to make the transaction too expensive for InBev. While it publicly professed to want a friendly transaction, InBev wasted no time in turning up the heat. The firm launched a campaign to remove Anheuser's board and replace it with its own slate of candidates, including a Busch family member. However, AB was under substantial pressure from major investors to agree to the deal, since the firm's stock had been lackluster during the preceding several years. In an effort to gain additional shareholder support, InBev raised its initial $65 bid to $70. To eliminate concerns over its ability to finance the deal, InBev agreed to fully document its credit sources rather than rely on the more traditional but less certain credit commitment letters. In an effort to placate AB's board, management, and the myriad politicians who railed against the proposed transaction, InBev agreed to name the new firm Anheuser-Busch InBev and keep Budweiser as the new firm's flagship brand and St. Louis as its North American headquarters. In addition, AB would be given two seats on the board, including August A. Busch IV, AB's CEO and patriarch of the firm's founding family. InBev also announced that AB's 12 U.S. breweries would remain open. By the end of 2010, the combined firms seemed to be progressing well, with the debt accumulated as a result of the takeover being paid off faster than planned. Earnings per share exceeded investor expectations. The sluggish growth in the U.S. market was offset by increased sales in Latin America. Challenges remain, however, since AB Inbev still must demonstrate that it can restore growth in the U.S. ^{Schultes, 2010} : -What is a friendly takeover? Speculate as to why it may have turned hostile?

The interest rate parity theory relates forward or future spot exchange rates to differences in interest rates between two countries adjusted by the spot rate.

Language barriers,different customs,working conditions,work ethics,and legal structures create a new set of challenges in integrating cross-border transactions.

The basic differences between within-country and cross-border valuation methods is that the latter involves converting cash flows from one currency into another and adjusting the discount rate for risks not generally found when the acquirer and target firms are within the same country.

Interest rates and expected inflation in one country compared to another country seldom affect exchange rates between the two countries.

The disadvantages of exporting include high transportation costs,exchange rate fluctuations,and possible tariffs placed on imports into the local country.

Quotas and tariffs on imports imposed by governments to protect domestic industries tend to discourage foreign direct investment.

Overcoming Political Risk in Cross-Border Transactions: China's CNOOC Invests in Chesapeake Energy Cross-border transactions often are subject to considerable political risk. In emerging countries, this may reflect the potential for expropriation of property or disruption of commerce due to a breakdown in civil order. However, as Chinese efforts to secure energy supplies in recent years have shown, foreign firms have to be highly sensitive to political and cultural issues in any host country, developed or otherwise. In addition to a desire to satisfy future energy needs, the Chinese government has been under pressure to tap its domestic shale gas deposits due to the clean burning nature of such fuels to reduce its dependence on coal, the nation's primary source of power. However, China does not currently have the technology for recovering gas and oil from shale. In an effort to gain access to the needed technology and to U.S. shale gas and oil reserves, China National Offshore Oil Corporation Ltd. in October 2010 agreed to invest up to $2.16 billion in selected reserves of U.S. oil and gas producer Chesapeake Energy Corp. Chesapeake is a leader in shale extraction technologies and an owner of substantial oil and gas shale reserves, principally in the southwestern United States. The deal grants CNOOC the option of buying up to a third of any other fields Chesapeake acquires in the general proximity of the fields the firm currently owns. The terms of the deal call for CNOOC to pay Chesapeake $1.08 billion for a one-third stake in a South Texas oil and gas field. CNOOC could spend an additional $1.08 billion to cover 75 percent of the costs of developing the 600,000 acres included in this field. Chesapeake will be the operator of the JV project in Texas, handling all leasing and drilling operations, as well as selling the oil and gas production. The project is expected to produce as much as 500,000 barrels of oil daily within the next decade, about 2.5 percent of the current U.S. daily oil consumption. Having been forced in 2005 to withdraw what appeared to be a winning bid for U.S. oil company Unocal, CNOOC stayed out of the U.S. energy market until 2010. The firm's new strategy includes becoming a significant partner in joint ventures to develop largely untapped reserves. The investment had significant appeal to U.S. interests because it represented an opportunity to develop nontraditional sources of energy while creating thousands of domestic jobs and millions of dollars in tax revenue. This investment was particularly well timed, as it coincided with a nearly double-digit U.S. jobless rate; yawning federal, state, and local budget deficits; and an ongoing national desire for energy independence. The deal makes sense for debt-laden Chesapeake, since it lacked the financial resources to develop its shale reserves. In contrast to the Chesapeake transaction, CNNOC tried to take control of Unocal, triggering what may be the most politicized takeover battle in U.S. history. Chevron, a large U.S. oil and gas firm, had made an all-stock $16 billion offer (subsequently raised to $16.5 billion) for Unocal, which was later trumped by an all-cash $18.5 billion bid by CNOOC. About three-fourths of CNOOC's all-cash offer was financed through below-market-rate loans provided by its primary shareholder: the Chinese government. CNOOC's all-cash offer sparked instant opposition from members of Congress, who demanded a lengthy review and introduced legislation to place even more hurdles in CNOOC's way. Hoping to allay fears, CNOOC offered to sell Unocal's U.S. assets and promised to retain all of Unocal's workers, something Chevron was not prone to do. U.S. lawmakers expressed concern that Unocal's oil drilling technology might have military applications and CNOOC's ownership structure (i.e., 70 percent owned by the Chinese government) would enable the firm to secure low-cost financing that was unavailable to Chevron. The final blow to CNOOC's bid was an amendment to an energy bill passed in July requiring the Departments of Energy, Defense, and Homeland Security to spend four months studying the proposed takeover before granting federal approval. Perhaps somewhat naively, the Chinese government viewed the low-cost loans as a way to "recycle" a portion of the huge accumulation of dollars it was experiencing. While the Chinese remained largely silent through the political maelstrom, CNOOC's management appeared to be greatly surprised and embarrassed by the public criticism in the United States about the proposed takeover of a major U.S. company. Up to that point, the only other major U.S. firm acquired by a Chinese firm was the 2004 acquisition of IBM's personal computer business by Lenovo, the largest PC manufacturer in China. Many foreign firms desirous of learning how to tap shale deposits from U.S. firms like Chesapeake and to gain access to such reserves have invested in U.S. projects, providing a much-needed cash infusion. In mid-2010, Indian conglomerate Reliance Industries acquired a 45 percent stake in Pioneer Natural Resources Company's Texas natural gas assets and has negotiated deals totaling $2 billion for minority stakes in projects in the eastern United States. Norwegian oil producer Statoil announced in late 2010 that it would team up with Norwegian oil producer Talisman Energy to buy $1.3 billion worth of assets in the Eagle Ford fields, the same shale deposit being developed by Chesapeake and CNOOC. -Compare and contrast the Chesapeake and Unocal transactions.Be specific.

Which of the following represent common international market entry strategies?

The forward triangular cash merger is the most common form of taxable transaction.The target company merges with a U.S.subsidiary of the foreign acquirer with shareholders of the target firm receiving acquirer shares as well as cash,although cash is the predominate form of payment.

If the acquisition is structured as an asset purchase because the target is only a division of a foreign company or because the seller agrees to sell assets,the U.S.buyer of the assets must decide whether to acquire them directly or to use a new or existing foreign company to do so.The choice will affect future U.S.and non-U.S.tax consequences.

International transactions tend to be highly challenging,as they typically involve multiple tax and legal jurisdictions.

Arcelor Outbids ThyssenKrupp for Canada's Dofasco Steelmaking Operations Arcelor Steel of Luxembourg, the world's second largest steel maker, was eager to make an acquisition. Having been outbid by Mittal, the world's leading steel firm, in its efforts to buy Turkey's state-owned Erdemir and Ukraine's Kryvorizhstal, Guy Dolle, Arcelor's CEO, seemed determined not to let that happen again. Arcelor and Dofasco had been in talks for more than four months before Arcelor decided to initiate a tender offer on November 23, 2005, valued at $3.8 billion in cash. Dofasco, Canada's largest steel manufacturer, owned vast coal and iron ore reserves, possessed a nonunion workforce, and sold much of its steel to Honda assembly plants in the United States. The merger would enable Arcelor, whose revenues were concentrated primarily in Europe, to diversify into the United States. Contrary to their European operations, Arcelor found the flexibility offered by Dofasco's nonunion labor force highly attractive. Moreover, by increasing its share of global steel production, Arcelor's management reasoned that it would be able to exert additional pricing leverage with both customers and suppliers. Serving the role of "white knight," Germany's ThyssenKrupp, the sixth largest steel firm in the world, offered to acquire Dofasco one week later for $4.1 billion in cash. Dofasco's board accepted the bid, which included a $187 million breakup fee should another firm acquire Dofasco. Investors soundly criticized Dofasco's board for not opening up the bidding to an auction. In its defense, the board expressed concern about stretching out the process in an auction over several weeks. In late December, Arcelor topped the ThyssenKrupp bid by offering $4.2 billion. Not to be outdone, ThyssenKrupp matched the Arcelor offer on January 4, 2006. The Dofasco board reaffirmed its preference for the ThyssenKrupp bid, due to the breakup fee and ThyssenKrupp's willingness (unlike Arcelor) to allow Dofasco to continue to operate under its own name and management. In a bold attempt to put Dofasco out of reach of the already highly leveraged ThyssenKrupp, Arcelor raised its bid to $4.8 billion on January 16, 2006. This bid represented an approximate 80 percent premium over Dofasco's closing share price on the day Arcelor announced its original tender offer. The Arcelor bid was contingent on Dofasco withdrawing its support for the ThyssenKrupp bid. On January 24, 2006, ThyssenKrupp said it would not raise its bid. Events in the dynamically changing global steel market were not to end here. The Arcelor board and management barely had time to savor their successful takeover of Dofasco before Mittal initiated a hostile takeover of Arcelor. Ironically, Mittal succeeded in acquiring its archrival, Arcelor, just six months later in a bid to achieve further industry consolidation. and Answers: -Why do you believe that Dofasco's board was concerned about a lengthy auction process? discussion of the Mittal-Arcelor transaction.

Arcelor Outbids ThyssenKrupp for Canada's Dofasco Steelmaking Operations Arcelor Steel of Luxembourg, the world's second largest steel maker, was eager to make an acquisition. Having been outbid by Mittal, the world's leading steel firm, in its efforts to buy Turkey's state-owned Erdemir and Ukraine's Kryvorizhstal, Guy Dolle, Arcelor's CEO, seemed determined not to let that happen again. Arcelor and Dofasco had been in talks for more than four months before Arcelor decided to initiate a tender offer on November 23, 2005, valued at $3.8 billion in cash. Dofasco, Canada's largest steel manufacturer, owned vast coal and iron ore reserves, possessed a nonunion workforce, and sold much of its steel to Honda assembly plants in the United States. The merger would enable Arcelor, whose revenues were concentrated primarily in Europe, to diversify into the United States. Contrary to their European operations, Arcelor found the flexibility offered by Dofasco's nonunion labor force highly attractive. Moreover, by increasing its share of global steel production, Arcelor's management reasoned that it would be able to exert additional pricing leverage with both customers and suppliers. Serving the role of "white knight," Germany's ThyssenKrupp, the sixth largest steel firm in the world, offered to acquire Dofasco one week later for $4.1 billion in cash. Dofasco's board accepted the bid, which included a $187 million breakup fee should another firm acquire Dofasco. Investors soundly criticized Dofasco's board for not opening up the bidding to an auction. In its defense, the board expressed concern about stretching out the process in an auction over several weeks. In late December, Arcelor topped the ThyssenKrupp bid by offering $4.2 billion. Not to be outdone, ThyssenKrupp matched the Arcelor offer on January 4, 2006. The Dofasco board reaffirmed its preference for the ThyssenKrupp bid, due to the breakup fee and ThyssenKrupp's willingness (unlike Arcelor) to allow Dofasco to continue to operate under its own name and management. In a bold attempt to put Dofasco out of reach of the already highly leveraged ThyssenKrupp, Arcelor raised its bid to $4.8 billion on January 16, 2006. This bid represented an approximate 80 percent premium over Dofasco's closing share price on the day Arcelor announced its original tender offer. The Arcelor bid was contingent on Dofasco withdrawing its support for the ThyssenKrupp bid. On January 24, 2006, ThyssenKrupp said it would not raise its bid. Events in the dynamically changing global steel market were not to end here. The Arcelor board and management barely had time to savor their successful takeover of Dofasco before Mittal initiated a hostile takeover of Arcelor. Ironically, Mittal succeeded in acquiring its archrival, Arcelor, just six months later in a bid to achieve further industry consolidation. and Answers: -What do you think was the logic underlying Arcelor and ThyssenKrupp's bidding strategies? Be specific.

Excess capacity in many industries often drives M&A activity as firms strive to achieve which of the following?