Solutions – Chapter 11 1 Chapter 11 Mergers and Acquisitions Question 1. During the early 1990s there was a noticeable increase in mergers and acquisitions between firms in different countries (termed cross-border acquisitions). What factors could explain this increase? What special issues can arise in executing a cross-border acquisition and in ultimately meeting your objectives for a successful combination? Several factors could help explain the increase in merger and acquisition activity between firms in different countries. These factors may include: Relaxation of foreign ownership laws. As countries have allowed greater foreign ownership of companies in certain industries (e.g., broadcasting, telephone, steel, automobile), foreign companies have undertaken mergers that were previously prevented due to governmental restrictions. Expansion of regional free trade areas. Once a regional trading block is implemented, it can become more difficult for foreign firms to export its products to countries within the block. As a result, a foreign firm may purchase a company within the block to guarantee access to the block. For example, many American firms rushed to purchase European firms before January 1, 1996 to assure continued access to markets of European Union members as integration of the EU markets entered its next phase. Similarly, increased free trade can create new opportunities for firms within the block to expand their markets. Acquisitions can provide a way of taking advantage of these opportunities. For example, the integration of markets in Europe may provide opportunities for, say, German and U.K. banks to use cross-border acquisitions to develop into a European bank. Globalization of certain industries. Once a company has reached the maximum production in its home market, it may seek greater economies of scale and scope by purchasing competitors in foreign markets. By expanding its production to the greatest extent possible, the firm hopes to achieve the most efficient cost structure. This globalization forces the remaining companies to consolidate to achieve the same level of scale and scope economies. Search for new markets. Once domestic markets for a specific product have matured, a domestic firm will often try to continue its expansion in foreign markets. Often, the easiest way to enter a foreign market is to purchase a company already operating in that market. It guarantees immediate market share and instant name recognition with local consumers. International mergers will create special issues that will ultimately affect the success of the merger. These special issues may include valuing a foreign company that operates and prepares its financial reports under different accounting rules. Differences in accounting rules may include: • Treatment of intangibles, such as research and development expenses, brand names, goodwill, patents, etc.
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