Stock market and investment regulations. The local stock market is a bellwether of integration from local markets to the global market. Indicators of stock market conditions are the number of listings, the daily trading volume, the number of initial public offerings, the height and trend of stock prices (especially the local stock market index), presence of sophisticated institutional investors, breadth of share ownership among households within the country, and concentration of share ownership of firms. Of vital importance to integration is the presence or absence of controls on the cross-border movement of capital, restrictions on share ownership by foreigners, and generally the adoption of market regulations in harmony with world market standards.
Watchdogs: auditors, free press, opposition political parties. Transparency of financial reporting and the adoption of accounting principles by active professional auditors in the local country are foundations of strong banking and stock market systems. But the country analyst should broaden the assessment to include other institutions that also play a watchdog role such as journalists and opposition politicians. Issues of particular importance are the suppression of governmental and corporate corruption. Some international business organizations publish corruption indexes.
Independent judiciary, rule of law, respect for contracts and property rights. Expropriation of wealth by government or by a private mafia is the nightmare of foreign direct investors. One measure of relief from these risks is the soundness of the system of justice in the local country. Failures of the judicial system often parallel failures in watchdog groups; therefore, information in the public domain may not give a clear indication of the strength of local justice. Here, interviews with local foreign investors will be indispensable. Respect for civil rights is another indicator of the integrity of the system of justice. Give careful attention to freedom of speech, freedom of religious observance, and respect for the rights of minorities and women.
Educational system. Literacy rates, schooling requirements, and the number and health of educational institutions give demographic backing to conclusions about the likely strength of the workforce, of human capital, and of the possible generation of new intellectual property.
Cultural View
Economic growth may also be culturally determined by factors such as work ethic, leadership, and entrepreneurship. Great ingredients do not guarantee a tasty dinner—such an outcome depends importantly on the cook. The M&A country analyst needs to assess the ability of the local culture to nurture these important attributes. Any scientific effort to do so borders on organizational psychology and anthropology, disciplines well beyond the scope of this book. But one can start a rich process of observation by focusing on inflection points in the foreign culture: selection of leaders, treatment of upstarts, tolerance of risk and of failure, and appetite for profit.
Exhibit 5.12 summarizes these factors and graphically suggests that the four categories (macroeconomic, microeconomic, institutional, and cultural) jointly complete the mosaic of assessment. A view about the economic future of a country relies on a coherent assessment of all perspectives.
SUMMARY AND IMPLICATIONS FOR THE PRACTITIONER
This chapter has argued that the M&A practitioner should widen his or her frame of reference to embrace the global market. The volume of cross-border M&A is large, and, if present trends of market integration continue, will get larger. Research suggests that foreign buyers pay more, creating a natural incentive for target shareholders to entertain offers from across borders. Certainly, the drivers of M&A outlined in this chapter echo the drivers of domestic M&A: Chapter 4 portrayed market turbulence as the primary driver. If anything, the cross-border arena displays more turbulence.
Cross-border M&A activity and its drivers pose some important implications for the practitioner.
Get a view about countries and regions. In the turbulent world arena, perhaps the worst stance is to be myopic, naive, and uninformed. This chapter gave a rough sketch of four perspectives that can aggregate to a view: macroeconomic, microeconomic, institutional, and cultural. These perspectives are not easily given to a checklist of data to acquire or analysis to do. Country analysis is a process of diagnosis (like medicine) rather than design (like engineering). Skills of investigation and reflection are important foundations for cross-border M&A.EXHIBIT 5.12 Country Analysis Based on Four Perspectives
Consider local and global turbulence and how it changes competition across borders. Attend to the sources of turbulence and its impacts—insights about these will spring from analysis of countries and regions. But one can also look to the well-known sources (technological innovation, deregulation, trade liberalization, demographic change, and market integration) and study their impacts on countries. Of special interest are “inflection points” or changes in economic or competitive conditions that may generate special investment opportunities. Also consider that turbulence usually has an asymmetric impact across countries—M&A can afford one form of arbitrage across these asymmetries.
Anticipate the reaction of competitors. Global market integration will admit new competitors to country arenas. But to the extent that trade blocs may restrict the entry of outsiders into your market, it becomes extremely important to anticipate the competitive actions and reactions of competitors. It is reasonable to assume that competitors within, and outside of, the bloc recognize both the effects of turbulence and the associated asymmetries.
Anticipate the reaction of investors. A mental trap of cross-border M&A is business imperialism, the view that your firm must “own” a place in a foreign market simply for its own sake. Under this view, the decision maker is distracted from a fundamental aim of capitalist enterprise, to create value for investors. The rise of sophisticated global financial intermediaries such as banks, mutual funds, and pension funds creates vocal investors who focus on value creation. The implication is that the logic of value creation will assume greater, not less, importance in accessing capital with which to finance M&A activities.
NOTES
1 1. In theory, the value of outbound M&A from the United States should not exceed outbound foreign direct investment. A close comparison of the exhibit will show that in some years this is not true. Most likely this anomaly is due to differences in the timing and value of flows of the two different series of information. But the qualitative point remains that M&A accounts for the bulk of foreign direct investment into and out of the United States.
2 2. A discussion of the UNCTAD finding is given in Dunning (1998). This is consistent with the findings of Pereiro (1998), who found that acquisitions account for 52 percent of all private foreign direct investment in Argentina from 1991 to 1997.
3 3. This is the thesis of Bleeke and Ernst (1996), who argue that many strategic alliances are de facto sales. Their clinical research on joint ventures and alliances revealed that many were founded on a belief that the business unit could not survive alone and, in effect, required at least partial ownership by an ally. They noted that frequently these partnerings end in a complete sale of the unit by the former parent.