Index

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

Bolt-on strategy, 149–150

Buyers, types of, 19

Call option, 78

example of, 79

Capital asset pricing model (CAPM), 67–68

examples of, 68–69

Capital budgeting approach, 58, 75

Capital IQ database, 23

CAPM. See Capital asset pricing model (CAPM)

Cash flows

financing activities, 42–43

investing activities, 42

operating activities, 42

statement of, 42

Centralization versus decentralization, 140

CFIUS. See Committee on Foreign Investment in the United States (CFIUS)

Chandler, Alfred, 6, 15

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

reasons for, 14–16

terminologies of, 12–14

Cost of capital

cost of debt, 70

cost of equity, 67–69

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

Cost of equity, 67–69

Cross-border mergers and acquisitions (M&As), 3

definition of, 14

risks associated with, 16–18

distribution risks, 17

foreign exchange and repatriation risks, 17

legal risks, 16–17

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

real exchange rate, 112–114

spot, forward, and swap currency transactions, 117–120

CSCEC. See China State Construction Engineering Corporation (CSCEC)

Culture

due diligence, 47–48

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

examples of, 123–124

spreadsheet approach, 58–61

Distribution risks, 17

Diversification, 15

Divestitures, 13

Domestic versus cross-border M&As, 19–20

Dual-class stock, 23

Due diligence, 24, 25, 43–44

financial, 45

market, 46

securing approval for, 128

types of, 45–48

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

fluctuations, 116–117

quotation, 111–112

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 options, 81–82

Financial restructuring method, 22

Financial synergy, 14–15

Financial time series, time variability of volatility of, 92–96

Financing plan, securing approval for, 129–130

Finder, 35–36

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

versus spot rates, 120–121

Free cash flows (FCF), 58–59

calculations, 59–61

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

integration planning, 143–144

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

integration of, 144–145

strategy for, 145–146

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 labor market, 6–7

of national enterprises, 5–6

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

Law of one price, 114–116

Legal adviser, 34

Legal agreement, for investment, 47

Legal due diligence, 45–46

Legal risks, 16–17

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

Mardaka Company, 99–101

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)

accounting methods for, 49–54

buyers, types of, 19

domestic and cross-border versus, 19–20

integration, 133

option value used in, 98–99

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

strategy development, 29–30

challenges, 35–36

choosing of, 31

corporate development office and target acquisitions, 32–33

development of, 32

lead advisers in, 34–35

types of, 11–18

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

Negotiations, 24, 26

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

for M&As, valuing real, 82–85

premium, 78

terminologies, 76–78

types of, 81–82

Option price. See Option, premium

Organization

establishment of, 138

issues, 140–141

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

and reorganization, 133–137

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

Put option, 79–80

example of, 80–81

Ralls Corporation, 46

Real exchange rate, 112–116

Real option, 81–82

to abandon, 104–106

valuation in M&As, 99–106

Regulatory considerations, 130–131

Relative PPP, 116

Renminbi (RMB), 112, 113

Repatriation risks, 17

Restructuring method, 13, 22

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

versus forward rates, 120–121

Staffing plan, 141–142

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)

actions for rapid, 151–152

capital expenditure, 152

integration, 146–147

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

examples of, 119–120

Takeovers or buyouts, 13

Tall versus flat organization structures, 140

Target acquisitions, 32–33

Target company

for acquisition

barriers to entry in the industry, 39

developing acquisition candidate pool, 39–40

due diligence, 43–48

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

screening criteria, 40–41

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

Tender offer, 13, 127

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

Translation exposure, 124–125

Two-way trade, 3–4

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

formula approach to, 61–66

options

for M&As, valuing real, 82–85

mechanics of working of call and put, illustration of, 78–81

terminology, 76–78

type of, 81–82

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

examples of, 72–73