5 5. Conn and Nielsen (1990) found that 97 percent of U.S. acquirers and 93 percent of U.K. acquirers paid with cash. Ceneboyan et al. (1992) found that foreign buyers into the United States favored cash deals (85 percent), compared to 46 percent for domestic U.S. buyers.
6 6. Euroland includes 11 countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain), which adopted the euro as a common currency on January 1, 1999. Within the European Community, other agreements commit members to open borders and to the alignment of tax and regulatory policies. The North American Free Trade Agreement (NAFTA) embraces Canada, Mexico, and the United States with reductions in trade barriers and tariffs.
7 7. Hostile bids contemporaneous with the formation of the EMU included:Olivetti’s hostile bid for the leading Italian telecommunications firm, Telecom Italia, the sixth-largest telephone company in the world. Olivetti’s financial advisers were Italy’s Mediobanca and three American firms: Donaldson, Lufkin & Jenrette; Lehman Brothers; and Chase Bank. Instituto Mobiliare Italiana and three American firms advised Telecom Italia: J. P. Morgan, CS First Boston, and Lazard. Olivetti’s bid was denominated in euros and would be financed by the issuance of a “megabond” on the euro capital markets worth $15 billion.Luxury-goods manufacturer LVMH Moet Hennessey Louis Vuitton’s “creeping takeover” of Gucci. This contest featured a variety of legal maneuvers and antitakeover defenses.Banque Nationale de Paris’ hostile bid for both Societe Generale and Paribas, which would create the largest financial institution in the world, with assets of more than $1 trillion. In the outcome, BNP successfully acquired Paribas and a one-third interest in Societe Generale.North America witnessed hostile transactions across NAFTA members that might not have been possible before the formation of the trading bloc:In 1999, Grupo Mexico successfully mounted an unsolicited offer for the U.S. copper producer Asarco, snatching the target from the U.S. bidder, Phelps Dodge.American Airlines and Onex, a U.S. private equity investment firm, made an unsolicited offer for Air Canada.
8 8. See Vernon (1974), Kindleberger (1969), Caves (1971), Buckley and Casson (1976), Magee (1976), and Dunning (1988).
9 9. See Caves (1971) and Magee (1976).
10 10. For discussions about global tax arbitrage by corporations, see Lessard (1985), Lessard and Shapiro (1983), and Rutenberg (1985).
11 11. Harris and Ravenscraft (1991) found that changes in U.S. tax laws are not related to cross-border acquisition returns. Dewenter (1995) found no relationship between U.S. tax regime changes and cross-border M&A activity. However, Servaes and Zenner (1994) did find significant variation in returns to investors based on changes in tax laws. Manzon, Sharp, and Travlos (1994) found that cross-border acquisition announcement returns are not related to tax differences between the buyer and target country.
12 12. The recent literature on emerging markets integration lends rich insight into the sources of variability in returns, volatilities, and correlations. See, for instance, Bekaert and Harvey (1995, 1997), Bekaert, Erb, Harvey, and Viskanta (1997), Bekaert, Harvey and Lumsdaine (2002), Wurgler (2000), and Errunza and Miller (2000).
13 13. Agmon and Lessard (1977) find evidence that MNC betas reflect international involvement well. In contrast, Jacquillat and Solnik (1978) and Senchak and Beedles (1980) conclude that the effect of international diversification on a firm’s beta is less than direct, or at least nonlinear.
14 14. To diversify across global industries is to base portfolio allocations on industry choice first and then to pick the most attractive stocks within the industry, irrespective of country.
15 15. See, for instance, Lessard (1976), Solnik (1976), Solnik and de Freitas (1988), and Grinold, Rudd, and Stefek (1989).
16 16. Regarding findings about the rising influence of industry in explaining the cross section of global investing returns, see Diermeier and Solnik (2001), Cavaglia, Brightman, and Aked (2000), and Lombard, Roulet, and Solnik (1999). Studies that support the continued dominance of country choice include Heston and Rowenhorst (1994), Rowenhorst (1999), Kritzman and Page (2002), Gerard, Hillion, and de Roon (2002), and Isakov and Sonney (2002).
17 17. Tobin’s Q is measured as the ratio of market value divided by book value.
CHAPTER 6 Strategy and the Uses of M&A to Grow or Restructure the Firm
INTRODUCTION
Strategy influences M&A outcomes. It should be the engine driving M&A search, analysis, deal design, negotiation, integration, and process management; this chapter explores this linkage and describes how M&A fits into the broad spectrum of transactions that can expand or restructure the firm. Lessons include these:
To be strategic is to plan moves by looking ahead. A firm’s strategy is part of the three-legged stool: mission, objectives, and strategy.
Setting strategy begins with an assessment of the firm’s resources and competitive position. The situation of the firm can be summarized in an analysis of its strengths, weaknesses, opportunities, and threats (SWOT). Numerous tools and frameworks help assess the firm’s SWOT.
Three successful strategies are (1) low cost leadership, (2) differentiation, and (3) focus. Many firms try to blend these, to be all things at once—but this can be dangerous. You must choose.
The firm can grow organically (by internal investment) or inorganically by acquisitions, joint ventures, alliances, and contractual agreements. The right choice of the method of inorganic growth depends on the need for a business relationship, the need to be in control, and the need to manage risk exposure.
The firm can restructure in a variety of ways to enhance its efficiency and create value. Key alternatives are divestiture, spin-off, carve-out, split-off, tracking stock, and liquidation. The choice of method of restructuring will depend on the relationship of the business to the core operations of the firm, the need for control, and whether the business or asset can operate as an independent entity.
Whether diversification creates value for shareholders is a matter of sharp controversy. Conventional wisdom and some research hold that strategies of focus are better than strategies of diversification. Recent research raises the possibility that the diversification-versus-focus dichotomy may be false: Instead, the right stance may be to focus on relentless restructuring, through either diversification or focus, in response to changes in the firm’s strategic environment. Continue to watch the evolving research on this question.
SETTING STRATEGY
The design of a firm’s strategy springs from an understanding of the firm’s mission, objectives, SWOT, and market position. This section describes these foundational elements in more detail.