Security analysts and investors typically have

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Unformatted text preview: were part of a merged company, double taxation would not exist. The fact that holding companies are difficult to analyze is another disadvantage. Security analysts and investors typically have difficulty understanding holding companies because of their complexity. As a result, these firms tend to sell at low multiples of earnings (P/Es), and the shareholder value of holding companies may suffer. CHAPTER 17 Mergers, LBOs, Divestitures, and Business Failure 733 A final disadvantage of holding companies is the generally high cost of administration that results from maintaining each subsidiary company as a separate entity. A merger, on the other hand, is likely to result in certain administrative economies of scale. The need for coordination and communication between the holding company and its subsidiaries may further elevate these costs. International Mergers Perhaps in no other area does U.S. financial practice differ more fundamentally from practices in other countries than in the field of mergers. Outside of the United States (and, to a lesser degree, Great Britain), hostile takeovers are virtually nonexistent, and in some countries (such as Japan), takeovers of any kind are uncommon. The emphasis in the United States and Great Britain on shareholder value and reliance on public capital markets for financing is generally inapplicable in continental Europe. This occurs because companies there are generally smaller and because other stakeholders, such as employees, bankers, and governments, are accorded greater consideration. The U.S. approach is also a poor fit for Japan and other Asian nations. Changes in Western Europe Today, there are signs that Western Europe is moving toward a U.S.-style approach to shareholder value and public capital market financing. Since the final plan for European economic integration was unveiled in 1988, the number, size, and importance of cross-border European mergers have exploded. Nationally focused companies want to achieve economies of scale in manufacturing, encourage international product development strategies, and develop distribution networks across the continent. They are also driven by the need to compete with U.S. companies, which have been operating on a continentwide basis in Europe for decades. These larger European-based companies will probably prove to be even more formidable competitors once national barriers are fully removed. Although the vast majority of these cross-border mergers are friendly in nature, a few have been actively resisted by target firm managements. It seems clear that as European companies come to rely more on public capital markets for financing, and as the market for common stock becomes more truly European in character, rather than French or British or German, active markets for European corporate equity will inevitably evolve. Foreign Takeovers of U.S. Companies Both European and Japanese companies have been active as acquirers of U.S. companies in recent years. Foreign companies purchased U.S. firms for two major reasons:...
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