Cross border mergers Flashcards
What is the OLI framework ?
OLI stands for ownership, Location and Internasialation and was designed to help firms asses a new territiory
Ownership
-Asset exploiting
-Market seeking
-Asset augmenting
There must be a competitve advantage:
Asset exploiting - Deploying strategic assets that provide a comp advantage
Market seeking - Exploit assets in a foreign market in which they already have comparative advantages
Asset augmenting - Improve aat home operations from acquiring R&E from host country
Location
Geographical factors
Economic conditions
Regulatory environment
Internalization
-Control over operations
-Make or buy decisions
-Strategic alliencies
What is the role of an advisor for the bidder
-Identifying targets
-Valuation and fairness opinion
-Advising on payment method
-Provide negotiating tactics
-Info gathering
What is the role of an advisor for the target
-Monitors their shareprice
-Values the target
-Help prepare profits forecast
Does the choice of advisor impact abnormal returns ??
Yes - Golubov, Petmezas, Travlos 2010 found that top-tier advisors can generate higher abnormal returns
No - Sudarsanam and Salami 2001 found no difference between the quality of advisor and abnormal returns
What is Fair value opinion (FO)
- Detailed valuation of the company
- Offers a form of legal protection against shareholder lawsuits
- Can enhance the quality of the transaction
What is a divestiture ?
A process by which a company sells off, spins off or otherwise disposes of parts of its business or assets, It is a form of corporate restructuring often used to refocus a company’s strategy.
What 2 forms of divestiture does the firm lose control of the divested business
- Sell off
- Spin off
What is a sell off
Transaction between 2 separate companies, one buys and one sells
What are some key characteristics of a sell off
- The firm will benefit from the cash flow
- Help mitigate financial distress
- Eliminate negative synergies
- Release managerial resources
- Sharpen strategic focus
What is an empirical study of sell offs
Alexandrou and Sudarsanam 2001
What was the empirical findings of sell offs
- Found positive returns
- wealth experience of 877 buyers of UK divestitures
- Buyers experienced significant buy and hold abnormal returns of 0.48% over the 3 days following the transaction
-Larger gains when buying from financially stable buyers
-Larger purchases create more value
What is a spin-off
The company floats off a subsidiary and creates a new company, the shares of the new companay are then spun off to shareholders
What are some key characteristics of Spin-offs
- Parent company does not raise any cash
- Spin offs are usually larger than sell offs
- Increases that transparency of both firms
-Allows firm to create more efficient capital structure
Empirical studies of spin offs
Cusatis et al 1993
Dalay et al 1997
Veld and Veld Merkoulova 2009
What was the empirical findings of spin offs
- Returns are positive however they were not significant so they increased returns is not very relient on the spin off
What is an equity carve out ?
The sale of a minority or majority voting control in a subsidiary by its parents to outside investors
What are some key characteristics of equity carve outs
-Not complete separation from parent company
-Parent firm may continue to have mutual synergies
-The divested firm recieves cash from sale
Empirical studies of equity carve outs
Schipper and smith 1986
Slovin, Shushka and Ferraro 1995
Empirical findings for equity carve outs
-The parents earned significant abnormal returns
-However over the long run no significant returns were observed
LIst the payment methods of a cross border deal
-Cash
-Stock exchange
-Cash underwritten loan offer
-Loan stock
-convertible loans
-Deferred payment
Explain stock exchange as a payment method
Bidder offers a specific number of shares for each target share
Explain cash underwritten loan offer as a payment method
Target recieves shares from bidder and then takes them to an underwriter such as an investment bank and sells them for cash
Explain convertible loans as a payment method
-Bidder pays in shares that the target can turn into equity at a later date
Explain deferred payment as a payment method
Part of the payment is made after a specific date, contingent on performance criteri
What are some factors influencing payment
Bidders Liquidity
Recent stock performances
How much leverage is in company
Nature of acquired business
How would bidders liquidity influence payment method
A companys availability of liquid assets or more so the higher liquidity would prefer cash payments
How would recent stock performances influence payment decision
A strong stock price can make a stock payment more desireble to bidders
Why might the leverage of a company influence the payment decision
As a company with high levels of debt might prefer to pay with cash as to avoid the financial burden that comes with paying in stocks
Why might the nature of the business acquired influence the payment decision
The volatitlity and type of asset acquired
What did martin (1996) find empirically about the method of payment
- When bidders growth opportunity are high, stock offers are more preferable
-However he does find that when managerial ownership is neither too big or too small, they tend to avoid stock payment
What did Ghosh and Ruland (1998) find empirically about the method of payment
-Higher likelihood of stock offers when past revenues are high
-Higher liquidity decrease the chance of stock as payment
-Target managers with larger stock ownership prefer stock
What did Malmendier and Tate (2008) find empirically about the method of payment
That overconfident managers are likely to pay with cash as to appear more stable
What did Salami and Sudarsanam (2000) find empirically about the method of payment
-Cash offers are more likely when target is relatively small and bidders FCF and cash positions are high
-High stock returns enhance stock payment
-Bidders with large shareholder are less likely to pay with stock
