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

Question

While a foreign buyer may acquire shares or assets directly,share acquisitions are generally the simplest form of acquisition.

Use Space or

to flip the card.

Question

Firms investing in industries or countries whose economic cycles are highly correlated may lower the overall volatility in their consolidated earnings and cash flows.

Question

A tax- free reorganization or merger is one in which target shareholders receive acquirer stock in exchange for substantially all of the target's assets or shares.The target firm merges with a U.S.subsidiary of the foreign acquirer in a statutory merger under state laws.

Question

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

Question

Licensing allows a firm to purchase the right to manufacture and sell another firm's products within a specific country or set of countries.

Question

Excess capacity in many industries often drives M&A activity as firms strive to achieve greater economies of scale and scope,as well as pricing power with customers and suppliers.

Question

There is no limitation on non-U.S.persons or entities acting as shareholders in U.S.corporations,except for certain regulated industries.

Question

Globally integrated capital markets provide foreigners with unfettered access to local capital markets and local residents to foreign capital markets.

Question

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

Question

A C corporation is the typical acquisition vehicle used by foreign buyers of U.S.businesses due to its flexibility.

Question

Like globally integrated capital markets,segmented capital markets exhibit different bond and equity prices in different geographic areas for different assets in terms of risk and maturity.

Question

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.

Question

Factors contributing to the integration of global capital markets include the reduction in trade barriers,removal of capital controls,the growing disparity in tax rates among countries,floating exchange rates,and the free convertibility of currencies.

Question

Appreciating foreign currencies relative to the dollar increase the overall cost of investing in the U.S.

Question

M&As can provide quick access to a new market; and,they are subject to fewer problems than domestic M&As.

Question

M&As represent by far the most profitable means of entering foreign markets.

Question

Investors in segmented markets will bear a lower level of risk by holding a disproportionately large share of their investments in their local market as opposed to the level of risk if they invested in a globally diversified portfolio.

Question

To qualify as a U.S.corporation for tax purposes,the foreign firm must own at least 80% of the stock of the domestic subsidiary.

Question

Firms with significant expertise,brands,patents,copyrights,and proprietary technologies seek to grow by exploiting these advantages in emerging markets.

Question

Target shareholders most often receive shares rather than cash in cross-border transactions.

Question

In cross-border M&As,acquirer shares often are less attractive to potential targets because of the absence of a liquid market for resale or because the acquirer is not widely recognized by the target firm's shareholders.

Question

As in the U.S.,any representations and warranties in an acquisition agreement are intended to cause the seller to disclose significant information.However,because of local custom,they are often more extensive in foreign countries than in the U.S.

Question

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.

Question

In common law countries (e.g.,U.K.,Canada,Australia,India,Pakistan,Hong Kong,Singapore,and other former British colonies),the acquisition vehicle will be a corporation-like structure.

Question

Despite accounting practices varying widely from country to country,the seller should not be required to confirm that their financial statements have been prepared in accordance with generally accepted accounting principles if to do so would endanger the deal.

Question

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

Question

In civil law countries (which include Western Europe,South America,Japan,and Korea),the acquisition will generally be in the form of a share company or limited liability company.

Question

It is easy to differentiate between political and economic risks,since they are generally unrelated.

Question

The American Depository Receipt (ADR)market evolved as a means of enabling foreign firms to raise funds in the U.S.equity markets.

Question

In choosing how to manage an acquisition in a new country,a manager with an in-depth knowledge of the acquirer's priorities,decision-making processes,and operations is appropriate,especially when the acquirer expects to make very large new investments.

Question

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

Question

Mergers are legal in all countries.

Question

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

Question

The Euroequity market reflects equity issues by a foreign firm tapping a larger investor base than the firm's home equity market.

Question

Payment in transactions involving non-U.S.firms is most likely to be cash.

Question

Acquiring businesses outside the U.S.involves additional obstacles atypical of domestic acquisitions.

Question

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

Question

With tax avoidance and fraud common in many countries,the buyer may find that some assets will transfer encumbered by tax liens.

Question

Product liability claims are generally more frequent and judgments are larger outside the U.S.

Question

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.

Question

The methodology for valuing cross-border transactions using discounted cash flow analysis is substantially different from that employed when both the acquiring and target firms are within the same country.True of False

Question

The decision to buy political risk insurance depends on the size of the investment and the perceived level of political and economic risk.

Question

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.

Question

If cash flows are in terms of local currency and the U.S.Treasury bond rate is used to estimate the risk free rate,the analyst should add the expected inflation rate in the local country relative to that in the U.S.to convert the U.S.Treasury bond rate to a local country nominal rate.

Question

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

Question

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.

Question

In globally integrated markets,it makes little difference whether the ß is calculated by regressing the target firm's (or a similar firm's)historical returns against the returns for a broadly defined global index,U.S.equity market index,or a broadly defined equity index in the target's country.

Question

A sometimes overlooked challenge is the failure of the legal system in an emerging country to honor contracts.

Question

In emerging countries where financial statements may be haphazard and gaining access to the information necessary to adequately assess risk is limited,it may be impossible to perform an adequate due diligence.Under these circumstances,acquirers may protect themselves by including a put option in the agreement of purchase and sale.Such an option would enable the buyer to require the seller to repurchase shares from the buyer at a predetermined price under certain circumstances.

Question

Nominal or real cash flows should give different net present values if the expected rate of inflation used to convert future cash flows to real terms is the same inflation rate used to estimate the real discount rate.

Question

If individual country's capital markets are segmented,the global capital asset pricing model must not be adjusted to reflect the tendency of investors in individual countries to hold local country rather than globally diversified equity portfolios.

Question

The purchasing power parity theory states that one currency will appreciate (depreciate)with respect to another currency according to the expected relative rates of inflation between the two countries.

Question

Which of the following factors contribute to the integration of the global capital markets?

A) The reduction in trade barriers
B) The removal of capital controls
C) The harmonization of tax laws
D) Floating exchange rates
E) All of the above

Question

Whenever the target firm's projected cash flows are in local currency,the risk free rate is the local country's government bond rate.

Question

In general,the appropriate marginal tax rate used in calculating cash flows and the discount rate should be that applicable to the country in which the cash flows are produced.

Question

Developed economies seem to exhibit significant differences in the cost of equity due to the relatively high integration of their capital markets in the global capital market.

Question

M&A practitioners utilize nominal cash flows except in circumstances of high rates of inflation,when real cash flows are preferable.

Question

Unanticipated changes in exchange rates rarely influence the competitiveness of products produced in the local market for export to the global marketplace.

Question

An analyst can determine if a country's equity market is likely to be segmented from the global equity market if the ß derived by regressing returns in the foreign market with returns on the global equity market is significantly different from one.

Question

For developed countries,such as Western Europe,the interest rate parity theory provides a useful framework for estimating forward currency exchange rates (i.e.,future spot exchange rates).

Question

Which of the following represent common international market entry strategies?

A) Mergers and acquisitions
B) Licensing
C) Exporting
D) Greenfield or solo ventures
E) All of the above

Question

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.
To what extent does the Chesapeake transaction represent the benefits of free global trade and capital movements? In what way might it reflect the limitations of free trade?

Question

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

A) Entry barriers are low
B) Cultural differences are high
C) Entrant has limited multinational experience
D) Entrant is risk adverse
E) A and B only

Question

For an acquirer evaluating a target firm in another country,the target's cash flows can be expressed in which of the following ways?

A) Expressed in the home country's currency
B) Local country's currency
C) In real terms
D) A & B only
E) A, B, and C

Question

Local country firms may be interested in alliances for which of the following reasons?

A) To gain access to the technology
B) To gain access to a widely recognized brand name
C) To gain access to innovative products
D) A, B, and C
E) A and B only

Question

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.
Describe some of the ways in which CNOOC could protect its rights as a minority investor in the joint venture project with Chesapeake? Be specific.

Question

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

A) Greater economies of scale
B) Greater economies of scope
C) Greater pricing power with customers
D) Greater pricing power with suppliers
E) All of the above

Question

Which of the following represent common components of the global capital asset pricing model when applied to valuing firms in emerging countries?

A) Risk free rate of return
B) Specific country's risk premium
C) Firm size risk premium
D) Emerging country firm's global beta
E) All of the above

Question

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.
What real options (see Chapter 8)might be implicit in CNNOC's investment in Chesapeake? Be specific.

Question

Firms are likely to achieve significant diversification by investing in all of the following except for

A) Different but uncorrelated industries in the same country
B) Different companies in the same industry in the same country
C) The same industries in different countries
D) Different industries in different countries.
E) Different companies in different industries in the different countries

Question

Which of the following is true about segmented capital markets?

A) Exhibit different bond and equity prices in different geographic areas for identical assets in terms of risk and maturity.
B) Exhibit the same bond and equity prices in different geographic areas for identical assets in terms of risk and maturity.
C) Exhibit different bond and equity prices in the same geographic areas for identical assets in terms of risk and maturity.
D) Exhibit different bond prices but the same equity prices in different geographic areas for identical assets in terms of risk and maturity.
E) None of the above

Question

Which of the following represent common law countries?

A) United Kingdom
B) Australia
C) India
D) Pakistan
E) All of the above

Question

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.

Question

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.
Do you believe that countries should permit foreign ownership of vital scarce natural resources? Explain your answer.

Question

Which of the following is not true of exporting as a market entry strategy?

A) Exporting does not require the expense of establishing local operations
B) Exporters do not need to establish some means of marketing and distributing their products at the local level
C) Exporters incur high transportation costs
D) Exporters may be adversely impacted by exchange rate fluctuations
E) Exporters may be adversely impacted by tariffs placed on imports into the local country

Question

The most common form of payment involving non-U.S.firms engaged in M&As is

A) Stock
B) Cash
C) Cash and stock
D) Debt
E) Cash, stock and debt

Question

Which of the following represent common political and economic risks in entering an emerging market?

A) Excessive local government regulation
B) Confiscatory tax rates
C) Lack of enforcement of contracts
D) Fluctuating exchange rates
E) All of the above `

Question

Which of the following is not true of licensing?

A) Licensing allows a firm to purchase the right to manufacture and sell another firm's products within a specific country or set of countries.
B) The licensor is normally paid a royalty on each unit sold.
C) Licensors have considerable control the manufacturing and marketing of their products marketed in foreign countries.
D) The licensee takes the risks and makes the investments in facilities for manufacturing, marketing and distribution of goods and services.
E) Licensing is an increasingly popular entry mode for smaller firms with insufficient capital and limited brand recognition.

Question

Which of the following is generally not a motive for firms to expand internationally?

A) Desire to achieve geographic diversification
B) Desire to accelerate growth
C) Desire to consolidate industries
D) Desire to avoid entry barriers
E) Desire to enter countries with less favorable tax rates

Question

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 rising commodity prices spark industry consolidation?

Unlock Deck

1/89

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

While a foreign buyer may acquire shares or assets directly,share acquisitions are generally the simplest form of acquisition.

True

Firms investing in industries or countries whose economic cycles are highly correlated may lower the overall volatility in their consolidated earnings and cash flows.

False

True

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

Unlock Deck