Chapter
15
Multinational Restructuring
J. Gaspar: Adapted from Jeff Madura, International Financial Management 15. 1
Slides by Yee-Tien (Ted) Fu
Corporate Restructuring
The business environment in most countries is never static and
firms that adapt to the changing economic realities are likely to
succeed while those who don’t will fail
The strategic actions that firms take to adapt to the changing
business environment is termed corporate restructuring
Multinational corporate restructuring may take the form of
organic growth, growth through acquisitions, or slimming down
operations through divestiture.
15. 2
Chapter Objectives
To introduce international acquisitions by MNCs
(e.g., Nokia-Alcatel/Lucent, AB InBev-SAB Miller)
as a form of multinational restructuring;
To explain how MNCs conduct valuations of
foreign target firms;
To explain why the valuations of a target firm may
vary among MNCs; and
To identify other methods of multinational
restructuring.
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Multinational Restructuring
• Building a new subsidiary, acquiring a company,
selling an existing subsidiary, downsizing
operations, and shifting production among
subsidiaries, are all forms of multinational
restructuring --to maximize shareholder wealth.
• MNCs continually assess possible forms of
multinational restructuring to capitalize on the
changing economic, political, and industrial
conditions across countries.
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International Acquisitions
• International acquisitions enable firms to quickly
expand their international business operations
since the target is already in place. The firm also
benefits from the established customer/supplier
relationships.
• However, establishing a new subsidiary usually
costs less (no market premium), and there will not
be a need to integrate the parent’s management
style with that of the target.
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Trends in International
Acquisitions
• The volume of foreign acquisitions by U.S. firms
has increased consistently since the 1990’s.
However, more recently (since 2005) emerging
market multinationals have been acquiring firms
increasingly in the U.S., EU and Africa.
• The rise of emerging market MNCs is a reflection
of the strong growth and confidence in these
countries as they liberalize and reform their
economies to release pent up entrepreneurship.
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Model for Valuing a Foreign
Firm
• Like in all long-term projects, capital budgeting
analysis can be used to determine whether a firm
should be acquired.
• Hence, the acquisition decision can be based on a
comparison of the benefits and costs as measured
by the project’s net present value (NPV).
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Model for Valuing a Foreign
Firm
• NPV = – initial outlay
n
+ Σ cash flow in period t
t =1 (1 + k )t
salvage value
+
(1 + k )n
k = the acquisition’s required rate of return
n = the lifetime of the acquired firm
• If NPV > 0, the firm can be acquired.
15. 8
Assessing Potential Acquisitions
After the EU Sovereign Debt Crisis
• Although the European Union’s debt crisis is
having devastating effects in several member
countries, it has created opportunities for
aggressive MNCs (especially from emerging
economies) to pursue new business in Europe
(e.g., Tata Steel-Corus).
• In Europe, property values have declined, the euro
has weakened, and many firms face bankruptcy
and are ripe targets for acquisition.
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Assessing Potential
Acquisitions in Europe
• However, MNCs must also consider the prospects
for lower economic growth rates in the EU as a
whole.
• Since many countries in Europe have adopted the
euro as their national currency this simplifies
analysis for MNCs as they try comparing NPV of
possible target firms in the Eurozone.
• Not all EU countries are alike, so MNCs need to
be selective.
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Factors that Affect the Expected
Cash Flows of the Foreign Target
Target-Specific Factors
Target’s previous cash flows – These may serve
as an initial base from which future cash flows can
be estimated.
Managerial talent of the target – The acquiring firm
may allow the acquired firm (the target) to be
managed as it was before the acquisition,
downsize the firm, or restructure its operations.
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Factors that Affect the Expected
Cash Flows of the Foreign Target
Country-Specific Factors
Target’s local economic conditions – Demand is likely
to be strong when the economic conditions are
favorable.
Target’s local political conditions – Cash flow shocks
are less likely when the political conditions are stable
Target’s domestic social conditions –The risk of strikes
and plant shut down are lower when social harmony
exists.
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Factors that Affect the Expected
Cash Flows of the Foreign Target
Country-Specific Factors
Target’s industry conditions – Industries with high
growth potential and non-excessive competition
are preferred.
Target’s currency conditions – A currency that is
expected to strengthen over time will usually
improve the target’s remitted earnings in reporting
currency to the parent.
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Factors that Affect the Expected
Cash Flows of the Foreign Target
Country-Specific Factors
Target’s local stock market conditions – When the
local stock market is depressed, the target’s
acceptable bid price is also likely to be low.
Taxes applicable to the target – What matters to
the acquiring firm is the after-tax cash flows that it
will ultimately receive in the form of remitted funds.
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Example of
The Valuation Process
• Lincoln Co., a U.S. MNC is considering plans
to expand its operations to either Latin
America or Canada.
• International screening process – Lincoln Co.,
must first identify the prospective targets and
then conduct an initial screening to pick out
those that deserve a closer assessment.
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Example of Process Used to
Screen Foreign Targets
Based on this screening process, Lincoln decides that the only
target worth further consideration is the target in Canada.
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Example of
the Valuation Process
• Estimating the target’s value – Once Lincoln
Co. has completed its initial screening, it
conducts a valuation (based on capital
budgeting analysis) of all the targets that
passed the screening process.
• Only those targets that are priced lower than
their estimated present values should be
acquired.
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Valuation of the Canadian
Target (millions of US dollars)
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Example of
The Valuation Process
• Suppose the target’s shares are currently worth
C$170 ($136) million, and Lincoln is willing to pay
a 10% premium (C$187/$150 million) to persuade
the target’s board of directors to approve the
acquisition.
• The target may reject the offer and ask for a
higher premium. However, Lincoln will not pay
more than its estimate of the target’s PV
(C$199/$159 million).
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Example of
The Valuation Process
• If Lincoln Co. decides not to bid for the target at
this time, it will have to redo its analysis if it later
reconsiders acquiring the target.
• The value of the target will change as the
expected cash flows and required rate of return
change. In addition, stock market and exchange
rate conditions will change as well.
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Why Valuations of a Target
May Vary Among MNCs
Estimated cash flows of the foreign target
• Each MNC will manage the target’s operations
differently.
• Each MNC will have a particular way of fitting the
target within the current structure of the MNC.
• Acquirers based in certain countries may be
subjected to lower taxes on remitted earnings
(based on bilateral tax treaties).
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Why Valuations of a Target
May Vary Among MNCs
Exchange rate effects on remitted funds
• Each MNC has its own strategic schedule for remitting
funds.
Required rate of return of the acquirer
• Since perceived risk is relative (country risk premium),
and MNCs may have their own plans for integrating the
target within their global operations, each MNC’s
required rate of return could vary significantly from
another.
• The local risk-free interest rate and WACC may differ for
MNCs based in different countries.
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Other Types of
Multinational Restructuring
International Partial Acquisitions
• MNCs may purchase a substantial portion of the
existing stock of a foreign firm, so as to gain some
control over the target’s management and
operations to enhance shareholder wealth.
• A firm’s valuation depends on whether the MNC
plans to acquire enough shares to control the firm
(and hence influence its cash flows).
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Other Types of
Multinational Restructuring
International Acquisitions of Privatized Businesses
• Many MNCs have acquired businesses from
foreign governments, e.g. Arcelor-Mittal’s
acquisition of privatized Ukrainian steel company.
• Businesses that are in the process of being
privatized are usually difficult to value because
those transaction entail many uncertainties—
input/output pricing, cash flows, benchmark data,
economic and political conditions, exchange rates,
financing costs, etc.
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Other Types of
Multinational Restructuring
International Alliances
• MNCs commonly engage in alliances, such as
joint ventures and licensing agreements, with
foreign firms.
• Strategic alliances, e.g., in airline industry partners
aim at maximizing capacity utilization and cost
economies.
• The initial outlay in alliances is typically small, and
the incremental cash flows received is
correspondingly small.
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Other Types of
Multinational Restructuring
International Divestitures
• MNCs periodically reassess their FDIs to
determine whether to retain those assets or to
sell (divest) them (e.g., GM-Volvo, Ford-
Jaguar/Land Rover).
• The MNC should compare the present value of
cash flows from the project if it is to be
continued, with the proceeds that would be
received (after taxes) if the project is divested.
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Divestiture Analysis: Spartan, Inc.
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