9 9. With benefit of 60 years’ hindsight, the echoing conclusions of Schumpeter’s best-known book, Capitalism, Socialism, and Democracy (1947) are wrong. He wrote, “Can capitalism survive? No. I do not think it can…. Can socialism work? Of course it can.” Perhaps in the fullness of time, history will reach his conclusion, though I doubt it. The basis for his conclusion was that capitalism creates so much internal turbulence in society that it will ultimately destroy the values and institutions that preserve it. He also believed that as the capitalist economy grows, ever-larger corporations will emerge—he argued that ultimately this would force the boisterous entrepreneur to adapt to working in a state bureaucracy, and that ultimately socialism could work. Any student of the collapse of the former Soviet Union and satellites, and of the economic rise of the West after World War II, however, would conclude otherwise.
10 10. With remarkable prescience, Schumpeter paints a profile of the entrepreneur that describes well many M&A professionals I have known: “First of all, there is the dream and the will to found a private kingdom, usually, though not necessarily, also a dynasty…. Then there is the will to conquer; the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself…. Finally there is the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity.” (Theory of Economic Development, 1947, pages 93–94.)
11 11. Schumpeter (1950), page 132.
12 12. Schumpeter (1947), page 255.
13 13. Schumpeter (1950), pages 82–84.
14 14. Lamoreaux (1988), page 158.
15 15. Ibid., pages 187–188.
16 16. Wasserstein (1998), pages 2–3.
17 17. Ibid., page 163.
18 18. The discussion in this section focuses on “effective yields” (or the annualized internal rate of return on the debt instrument), not coupon yields (or the stated return on the face of the bond).
19 19. Firms assume reinvestment risk where the life of liabilities is greater than the life of assets. Conversely, firms assume refinancing risk where the life of liabilities is less than the life of assets.
CHAPTER 5 Cross-Border M&A
INTRODUCTION
This chapter explores the special M&A perspectives where the buyer and target firm are in different countries. This complements several chapters as the cross-border deal raises especially difficult questions about strategy, valuation, deal design, and implementation. The M&A practitioner should master the perspective of cross-border deals because they:
Are significant. The volume of cross-border M&A activity is large, whether judged in terms of number of deals or value. The formation of trade blocs and regional associations hastens the growth in volume. And the volume of activity is likely to get bigger as country and regional markets integrate into the global market.
Can be disruptive. In many countries and regions, cross-border M&A activity produces big surprises in the form of unanticipated entry by buyers, higher purchase prices, and changes in strategic assumptions about a local market.
Can be motivated by a range of factors, different from domestic deals. These factors include growth by market expansion, extension of technology and brands, acquisition of special resources, tax and currency arbitrage, and the benefits of international diversification. This chapter will outline a number of these motives and summarize research on their effects.
Entail a fundamental bet on countries. Countries differ in important ways that will affect the values of firms. Beneath every cross-border valuation analysis is some hidden assumption or bet about the future of a country market. Since 1945, local product and financial markets have trended toward greater integration with global markets. Integration brings with it economic benefits as well as costs to the local markets and institutions. One should have a view about the direction and pace of integration within home and foreign countries. This chapter will sketch some steps for country analysis.
Affect analysis. It is a mistake to think that cross-border M&A is like domestic M&A, but with different-looking currency. In fact, going across borders requires adjustments in the valuation frameworks and analysis that one takes for granted in assessing domestic deals. Necessary adjustments in cash flows and discount rates can change the conclusions about a deal dramatically. Chapter 13 discusses the special adjustments for valuation across borders.
CROSS-BORDER M&A ACTIVITY
The volume of cross-border M&A transactions has risen to record levels in recent years. Exhibit 5.1 presents the trends of transactions involving a U.S.-based buyer or target:
Number of deals. Columns 1, 2, and 3 show that the volume of transactions by number of deals more than doubled from 1991 to 2000—and then fell to half by 2002. Classifying by whether the deal was “inbound” (i.e., where a U.S. firm was the target) or “outbound” (i.e., where a U.S. firm was the buyer) reveals that the biggest growth in the 1990s occurred in the number of outbound deals.
Dollar value of deals. Columns 4, 5, and 6 show huge increases in the dollar value of cross-border deals. In all years but two, the value of inbound deals has been greater than outbound deals (i.e., reversing the observation based on number of deals). Comparing the data on number of deals and value of deals, it appears that U.S. buyers have bought a larger number of smaller foreign targets, while foreign buyers have bought a smaller number of larger U.S. targets.
Cross-border volume relative to total M&A volume. Columns 7 and 8 present the percentage of cross-border deals relative to total amounts for U.S.-based deal volume. The cross-border number of deals represents between 17.6 and 25 percent of the total. And comparing the dollar volumes with the total inbound and outbound foreign direct investment (FDI) in the United States, M&A volume accounts for the bulk of FDI.1
Looking beyond the confines of U.S.-related deals, the United Nations Conference on Trade and Development (UNCTAD) estimates that cross-border acquisition is the largest medium of foreign direct investment, accounting for 55 to 60 percent of the totals.2 The volume of cross-border M&A is even larger if one considers other kinds of corporate transactions (e.g., joint ventures and project financings) possibly as partial or creeping acquisitions.3