Accounting adviser, 35
Accounting considerations, 129
Acquisitions, 12
candidate pool, development of, 39–40
vehicle, 129
Administrative organization, 6
Affordable price range, 41
American option, 78
Appreciation, currency, 116
Approximation method, normal distribution using, calculation of, 89–91
Arrow, definition of, 30
Asia, postmerger acquisition practices in, 155–156
Asymmetric information, problem of, 25
Basic formula, for valuation, 62
Black–Scholes Model, valuation of target company using, 87–89
Buyers, types of, 19
Call option, 78
example of, 79
Capital asset pricing model (CAPM), 67–68
Capital budgeting approach, 58, 75
Capital IQ database, 23
CAPM. See Capital asset pricing model (CAPM)
Cash flows
investing activities, 42
operating activities, 42
statement of, 42
Centralization versus decentralization, 140
CFIUS. See Committee on Foreign Investment in the United States (CFIUS)
Change in net working capital (CNWC), 60
China International Trust and Investment Company (CITIC), 47–48
China Railway Construction Corporation, 18
China State Construction Engineering Corporation (CSCEC), 18
CITIC. See China International Trust and Investment Company (CITIC)
CNWC. See Change in net working capital (CNWC)
Committee on Foreign Investment in the United States (CFIUS), 130
Communication
effective mechanism, 138
and transportation, internationalization of, 7–9
Company valuation, companies approach in, 56
Comparable transactions method, 57–58
Competitive advantage, definition of, 30
Complete integration, 137
Comprehensive due diligence, aims of, 44
Conglomerate mergers, 18
Consolidation, 12
strategy, 150
Constant cash flow growth, case of, 63
Contingent liability, 108
Contracting method, 22
Corporate culture, definition of, 30
Corporate development office, 32–33
Corporate restructuring, 11–12
Cost of capital
cost of debt, 70
raising funds via issuing preferred stocks, cost of, 70–71
as weighted average of costs of equity, debt, and preferred stocks, 71–73
Cost of debt, 70
Cross-border mergers and acquisitions (M&As), 3
definition of, 14
distribution risks, 17
foreign exchange and repatriation risks, 17
management risk, 16
political risks, 18
target valuation in
cash flow calculation in multinational operations in multiple currencies, 122–124
cross-border valuation, 121–122
exchange rate fluctuations, 116–117
foreign exchange risk exposure and mitigation, 124–125
forward versus spot rates, 120–121
law of one price and purchasing power, 114–116
nominal exchange rate and currency transactions, 111–112
spot, forward, and swap currency transactions, 117–120
CSCEC. See China State Construction Engineering Corporation (CSCEC)
Culture
monolithic view in defining, 30
Currency transactions, 111–112
DCF. See Discounted cash flow (DCF)
Deal structuring, 24
securing approval for, 128–129
Degree of integration, 134
Deloitte Consulting LLP, 136
Departmentalization, 140
Depreciation, currency, 116
Disclosure database, 23
Discounted cash flow (DCF), 75
calculation in multinational operations in multiple currencies, 122–123
Distribution risks, 17
Diversification, 15
Divestitures, 13
Domestic versus cross-border M&As, 19–20
Dual-class stock, 23
financial, 45
market, 46
securing approval for, 128
Dun & Bradstreet database, 23
Economic exposure, 124
Economies of scale, 14
EDGAR Online database, 23
Enron Corporation, 25
Enterprise cash flow, 59
Equity carve-out, 13
Ernst & Young’s survey, 34
European option, 78
Exchange rate
Exercise price, 76
Expiration date, 76
External opportunities method, 22
FASB. See Financial Accounting Standards Board (FASB)
FCF. See Free cash flows (FCF)
FDI. See Foreign direct investment (FDI)
Financial Accounting Standards Board (FASB), 49–50
Financial due diligence, 45
Financial integration, plan for, 142–143
Financial markets, internationalization of, 5
Financial modeling, 107
Financial restructuring method, 22
Financial time series, time variability of volatility of, 92–96
Financing plan, securing approval for, 129–130
FINSA. See Foreign Investment and National Security Act (FINSA)
Food and Drug Administration, 82
Foreign direct investment (FDI), 14
Foreign exchange
rate, 111
and repatriation risks, 17
risk exposure and mitigation, 124–125
Foreign Investment and National Security Act (FINSA), 130
Form of acquisition, 129
Form of payment, 129
Forward contracts, 118
examples of, 118
GAAP. See Generally Accepted Accounting Principles (GAAP)
GCE. See Gross capital expenditures (GCE)
GDP. See Gross domestic product (GDP)
Generally Accepted Accounting Principles (GAAP), 50
Global enterprises, 6
Global Market Information Database, 38
Global Resources International (GRI), 105
Goals, definition of, 29
Greenfield investment project, 14
GRI. See Global Resources International (GRI)
Gross capital expenditures (GCE), 59
Gross domestic product (GDP), 3
Herfindahl–Hirschman index (HHI), 37–38
HHI. See Herfindahl–Hirschman index (HHI)
Horizontal mergers, 18
Hostile takeover. See Hostile tender offer
Hostile tender offer, 127
Hubris, 15
Human resource (HR) management. See Staffing plan
Hybrid approach, 137
ICT. See Information and communication technology (ICT)
IFRS. See International Financial Reporting Standards (IFRS)
In-the-money options, 78
Income statement effects, 53–54
Industry roll-up, 13
Information and communication technology (ICT)
absorption strategy of, 146
Information technology (IT), 7–8
Intangibility, 8
Intangible assets, valuation of, 108
Integrated industrial enterprises, 6
Intellectual property (IP), 154–155
Internal changes method, 22
Internal controls integration, postacquisition processes and, 153–154
International Financial Reporting Standards (IFRS), 50
Internationalization of economies
of communication and transportation, 7–9
of financial markets, 5
of product and service markets, 3–5
transfers of technology, 5
Internet, 9
Investor buyers, 19
IP. See Intellectual property (IP)
IT. See Information technology (IT)
JIT. See Just-in-time (JIT)
Just-in-time (JIT), 147
Labor market, internationalization of, 6–7
Legal adviser, 34
Legal agreement, for investment, 47
Leveraged buyout, 13
Leveraged recapitalization, 13–14
LIBOR. See London Interbank Offer Rate (LIBOR)
Line-and-staff organization, 141
Line organization model authority, 141
Location of operations, 40
London Interbank Offer Rate (LIBOR), 130
Long position, 76
Long-term financing, 130
Management risk, 16
Management style, 154
Managerial and sociocultural integration, 135
Managerial capitalism, 15
Managerialism, 16
Market-based transactions approach, 56
Market capitalization, 40
Market due diligence, 46
Market power hypothesis asserts, 16
Market share, 38
Market Share Reporter, 38
Marketing factors, definition of, 41
Matrix-style organization, 141
Merger, 12
Merger and acquisitions (M&As)
buyers, types of, 19
domestic and cross-border versus, 19–20
integration, 133
overview of
acquisition or execution, 24
integration, 24
problems arising during and after completion of, 24–27
screening, 23
strategic (long-term) planning, 21–23
real options valuation in, 99–106
securing approval for, 127–128
choosing of, 31
corporate development office and target acquisitions, 32–33
development of, 32
valuing real options for, 82–85
Mintel Market Research Reports, 38
Mismanagement or agency problem, 15
Monte Carlo simulation, 99
Multidomestic enterprises, 6
National enterprises, internationalization of, 5–6
Net present value (NPV) calculation, 58
incremental profit approach to, 64–65
New York Stock Exchange, 111
No-growth case, 63
Nominal exchange rate, 111–112
Nonstorability, 8
Normal distribution, using approximation method, calculation of, 89–91
Objectives, definition of, 30
Operational restructuring, 12
Operator buyers, 19
Optimal supply chain
and corporate performance, 147–150
degree of integration, 150
Option
premium, 78
Option price. See Option, premium
Organization
establishment of, 138
model of, 141
rules and regulations, 139–140
Organizational culture, definition of, 30, 47
Organizational task, 134
Out-of-money options, 77
Parmalat group of Italy, 25
Personnel due diligence, 46
Physical integration, 135
Pip, 112
Planning and strategy, 142
Point, 112
Political risks, 18
Pooling-of-interest method, 49
Postacquisition integration of operations, 153–154
Postannouncement equity price, 57
Postclosing organization, 129
Postclosing real options, 82
Postmerger integration
acquisition practices in Asia, 155–156
approaches to integration, 137–155
risk factor for successful, 137
Preferred stocks, cost of raising funds via issuing, 70–71
Premerger integration plan, 137–138
Price paid for target company versus acquired firm’s net asset value, 50–53
Procedural integration, 135
Product and service markets, internationalization of, 3–5
Purchase accounting method, 50
Purchase method, 49
Purchasing power parity (PPP) theory, 115–116
Ralls Corporation, 46
Regulatory considerations, 130–131
Relative PPP, 116
Repatriation risks, 17
RMB–dollar exchange rate, 115
Sale agreement, 47
SCM. See Supply chain management (SCM)
Screening criteria, definition of, 40–41
SEC. See Securities and Exchange Commission (SEC)
Securities and Exchange Commission (SEC), 26, 49, 130
Services
definition of, 8
technology-based taxonomy of, 8
Short position, 76
Smithfield Foods, 131
Societa Metallurgica Italiana (SMI) Company, 75
Span of control, 140
Spin-off transactions, 13
Split-up, 13
Spot transactions, 117
examples of, 118
Standard & Poor’s Corporate Register database, 23
Status quo integration, 137
Statutory merger, 12
Strategy, definition of, 29
Strike price, 76
Subsidiary merger, 12
Supply chain management (SCM)
capital expenditure, 152
motives for acquisition and, 150
new corporate culture, formation of, 152–153
operating expense, 152
revenue, 152
short history of, 147
working capital, 152
Swap currency transactions, 118
Takeovers or buyouts, 13
Tall versus flat organization structures, 140
Target company
for acquisition
barriers to entry in the industry, 39
developing acquisition candidate pool, 39–40
financial assessment of acquiring company, 41–43
identifying and understanding the industry of, 37–38
market size and growth potential, 38–39
target-screening process, 40–41
technological changes and trends in the industry, 39
price paid for, 50
refining valuation of, 128
using Black–Scholes Model, valuation of, 87–108
valuation of, 24
Target-screening process, 40–41
prioritizing, 41
target profiles, 40
Target size preference, 41
Task characteristic, 134
Tax considerations, 129
Technical due diligence, 46
Temporary supernormal growth
then constant growth, case of, 63
then no growth, case of, 62
Term sheet, 47
Time variability of volatility, of financial time series, 92–96
Transaction exposure, 124
Transaction structure, state preference for, 41
Transfer of technology, international, 5
Transformative integration strategy, 149
Valuation
alternative approaches to, 55
challenges, 106
companies approach in company, 56
of company, real options analysis in, 75–76
comparable transactions method, 57–58
discount cash flow spreadsheet approach, 58–61
options
mechanics of working of call and put, illustration of, 78–81
of real call option to delay, 101–104
of target company, 24
using Black–Scholes Model, 87–108
Value assessor adviser, 35
Value date, 117
Variance of rate of return, 91–92
Vertical mergers, 18
Vision, definition of, 29
Volatility estimation, use of trading days and calendar days in, 96–98
Weighted average, 71