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Chapter 18 Cross-Border Mergers and Acquisitions:
Analysis and Valuation
True and False Examination Questions
1. Globally integrated capital markets provide foreigners with unfettered access to local capital
markets and local residents to foreign capital markets. True or False
2. Factors contributing to the integration of global capital markets include the reduction in trade
barriers, removal of capital controls, the growing disparity in tax rates among countries, floating
exchange rates, and the free convertibility of currencies. True or False
3. Like globally integrated capital markets, segmented capital markets exhibit different bond and
equity prices in different geographic areas for different assets in terms of risk and maturity. True
or False
4. Arbitrage should drive the prices in different markets to be the same, as investors sell those assets
that are undervalued to buy those that are overvalued. True or False
5. Investors in segmented markets will bear a lower level of risk by holding a disproportionately
large share of their investments in their local market as opposed to the level of risk if they invested
in a globally diversified portfolio. True or False
6. Firms investing in industries or countries whose economic cycles are highly correlated may lower
the overall volatility in their consolidated earnings and cash flows. True or false
7. Excess capacity in many industries often drives M&A activity as firms strive to achieve greater
economies of scale and scope, as well as pricing power with customers and suppliers. True or
False
8. Firms with significant expertise, brands, patents, copyrights, and proprietary technologies seek to
grow by exploiting these advantages in emerging markets. True or False
9. Quotas and tariffs on imports imposed by governments to protect domestic industries tend to
discourage foreign direct investment. True or False
10. Appreciating foreign currencies relative to the dollar increase the overall cost of investing in the
U.S. True or False
11. M&As can provide quick access to a new market; and, they are subject to fewer problems than
domestic M&As. True or False
12. The disadvantages of exporting include high transportation costs, exchange rate fluctuations, and
possible tariffs placed on imports into the local country. True or False
13. Licensing allows a firm to purchase the right to manufacture and sell another firm’s products
within a specific country or set of countries. True or False
14. M&As represent by far the most profitable means of entering foreign markets. True or False
15. A C corporation is the typical acquisition vehicle used by foreign buyers of U.S. businesses due to
its flexibility. True or False
16. There is no limitation on non-U.S. persons or entities acting as shareholders in U.S. corporations,
except for certain regulated industries. True or False
17. Target shareholders most often receive shares rather than cash in cross-border transactions. True
or False
18. While a foreign buyer may acquire shares or assets directly, share acquisitions are generally the
simplest form of acquisition. True or False
19. A tax- free reorganization or merger is one in which target shareholders receive acquirer stock in
exchange for substantially all of the target’s assets or shares. The target firm merges with a U.S.
subsidiary of the foreign acquirer in a statutory merger under state laws.
20. To qualify as a U.S. corporation for tax purposes, the foreign firm must own at least 80% of the
stock of the domestic subsidiary. True or False
21. The forward triangular cash merger is the most common form of taxable transaction. The target
company merges with a U.S. subsidiary of the foreign acquirer with shareholders of the target firm
receiving acquirer shares as well as cash, although cash is the predominate form of payment. True
or False
22. Acquiring businesses outside the U.S. involves additional obstacles atypical of domestic
acquisitions. True or False
23. In common law countries (e.g., U.K., Canada, Australia, India, Pakistan, Hong Kong, Singapore,
and other former British colonies), the acquisition vehicle will be a corporation-like structure.
True or False
24. In civil law countries (which include Western Europe, South America, Japan, and Korea), the
acquisition will generally be in the form of a share company or limited liability company. True or
False
25. Payment in transactions involving non-U.S. firms is most likely to be cash. True or False
26. In cross-border M&As, acquirer shares often are less attractive to potential targets because of the
absence of a liquid market for resale or because the acquirer is not widely recognized by the target
firm’s shareholders. True or False
27. With tax avoidance and fraud common in many countries, the buyer may find that some assets will
transfer encumbered by tax liens. True or False
28. Mergers are legal in all countries. True or False
29. International transactions tend to be highly challenging, as they typically involve multiple tax and
legal jurisdictions. True or False
30. If the acquisition is structured as an asset purchase because the target is only a division of a
foreign company or because the seller agrees to sell assets, the U.S. buyer of the assets must
decide whether to acquire them directly or to use a new or existing foreign company to do so. The
choice will affect future U.S. and non-U.S. tax consequences. True or False
31. Despite accounting practices varying widely from country to country, the seller should not be
required to confirm that their financial statements have been prepared in accordance with
generally accepted accounting principles if to do so would endanger the deal. True or False
32. Product liability claims are generally more frequent and judgments are larger outside the U.S.
True or False
33. Employees receive far greater legal protection in many developed foreign countries than they do in
the U.S. True or False
34. As in the U.S., any representations and warranties in an acquisition agreement are intended to
cause the seller to disclose significant information. However, because of local custom, they are
often more extensive in foreign countries than in the U.S. True or False
35. Bonds of a non-U.S. issuer registered with the SEC for sale in the U.S. public bond markets are
called “Yankee” bonds. True or False
36. The American Depository Receipt (ADR) market evolved as a means of enabling foreign firms to
raise funds in the U.S. equity markets. True or False
37. The Euroequity market reflects equity issues by a foreign firm tapping a larger investor base than
the firm’s home equity market. True or False
38. Language barriers, different customs, working conditions, work ethics, and legal structures create
a new set of challenges in integrating cross-border transactions. True or False
39. In choosing how to manage an acquisition in a new country, a manager with an in-depth
knowledge of the acquirer’s priorities, decision-making processes, and operations is appropriate,
especially when the acquirer expects to make very large new investments. True or False
40. It is easy to differentiate between political and economic risks, since they are generally unrelated.
True or False
41. A sometimes overlooked challenge is the failure of the legal system in an emerging country to
honor contracts. True or False
42. Unanticipated changes in exchange rates rarely influence the competitiveness of products
produced in the local market for export to the global marketplace. True or False
43. The decision to buy political risk insurance depends on the size of the investment and the
perceived level of political and economic risk. True or False
44. In emerging countries where financial statements may be haphazard and gaining access to the
information necessary to adequately assess risk is limited, it may be impossible to perform an
adequate due diligence. Under these circumstances, acquirers may protect themselves by
including a put option in the agreement of purchase and sale. Such an option would enable the
buyer to require the seller to repurchase shares from the buyer at a predetermined price under
certain circumstances. True or False
45. The methodology for valuing cross-border transactions using discounted cash flow analysis is
substantially different from that employed when both the acquiring and target firms are within the
same country. True of False
46. The basic differences between within-country and cross-border valuation methods is that the latter
involves converting cash flows from one currency into another and adjusting the discount rate for
risks not generally found when the acquirer and target firms are within the same country. True or
False
47. M&A practitioners utilize nominal cash flows except in circumstances of high rates of inflation,
when real cash flows are preferable. True or False
48. Nominal or real cash flows should give different net present values if the expected rate of inflation
used to convert future cash flows to real terms is the same inflation rate used to estimate the real
discount rate. True or False
49. Interest rates and expected inflation in one country compared to another country seldom affect
exchange rates between the two countries. True or False
50. For developed countries, such as Western Europe, the interest rate parity theory provides a useful
framework for estimating forward currency exchange rates (i.e., future spot exchange rates). True
or False
51. The interest rate parity theory relates forward or future spot exchange rates to differences in
interest rates between two countries adjusted by the spot rate. True or False
52. The purchasing power parity theory states that one currency will appreciate (depreciate) with
respect to another currency according to the expected relative rates of inflation between the two
countries. True or False
53. In general, the appropriate marginal tax rate used in calculating cash flows and the discount rate
should be that applicable to the country in which the cash flows are produced. True or False
54. Developed economies seem to exhibit significant differences in the cost of equity due to the
relatively high integration of their capital markets in the global capital market. True or False
55. Whenever the target firm’s projected cash flows are in local currency, the risk free rate is the local
country’s government bond rate. True or False
56. If cash flows are in terms of local currency and the U.S. Treasury bond rate is used to estimate the
risk free rate, the analyst should add the expected inflation rate in the local country relative to that
in the U.S. to convert the U.S. Treasury bond rate to a local country nominal rate. True or False
57. In globally integrated markets, it makes little difference whether the ß is calculated by regressing
the target firm’s (or a similar firm’s) historical returns against the returns for a broadly defined
global index, U.S. equity market index, or a broadly defined equity index in the target’s country.
True or False
58. If individual country’s capital markets are segmented, the global capital asset pricing model must
not be adjusted to reflect the tendency of investors in individual countries to hold local country
rather than globally diversified equity portfolios. True or False
59. An analyst can determine if a country’s equity market is likely to be segmented from the global
equity market if the ß derived by regressing returns in the foreign market with returns on the
global equity market is significantly different from one. True or False
60. Due to absence of historical data in many emerging economies, the equity risk premium often is
estimated using the prospective method implied in the constant growth valuation model. True or
Multiple Choice Examination Questions
1. Which of the following factors contribute to the integration of the global capital markets?
a. The reduction in trade barriers
b. The removal of capital controls
c. The harmonization of tax laws
d. Floating exchange rates
e. All of the above
2. Which of the following is true about segmented capital markets?
a. Exhibit different bond and equity prices in different geographic areas for identical assets
in terms of risk and maturity.
b. Exhibit the same bond and equity prices in different geographic areas for identical assets
in terms of risk and maturity.
c. Exhibit different bond and equity prices in the same geographic areas for identical assets
in terms of risk and maturity.
d. Exhibit different bond prices but the same equity prices in different geographic areas for
identical assets in terms of risk and maturity.
e. None of the above
3. Which of the following is generally not a motive for firms to expand internationally?
a. Desire to achieve geographic diversification
b. Desire to accelerate growth
c. Desire to consolidate industries
d. Desire to avoid entry barriers
e. Desire to enter countries with less favorable tax rates
4. Firms are likely to achieve significant diversification by investing in all of the following except for
a. Different but uncorrelated industries in the same country
b. Different companies in the same industry in the same country
c. The same industries in different countries
d. Different industries in different countries.
e. Different companies in different industries in the different countries
5. Excess capacity in many industries often drives M&A activity as firms strive to achieve which of
the following?
a. Greater economies of scale
b. Greater economies of scope
c. Greater pricing power with customers
d. Greater pricing power with suppliers
e. All of the above
6. Which of the following represent common international market entry strategies?
a. Mergers and acquisitions
b. Licensing
c. Exporting
d. Greenfield or solo ventures
e. All of the above
7. Local country firms may be interested in alliances for which of the following reasons?
a. To gain access to the technology
b. To gain access to a widely recognized brand name
c. To gain access to innovative products
d. A, B, and C
e. A and B only
8. Which of the following is not true of exporting as a market entry strategy?
a. Exporting does not require the expense of establishing local operations
b. Exporters do not need to establish some means of marketing and distributing their
products at the local level
c. Exporters incur high transportation costs
d. Exporters may be adversely impacted by exchange rate fluctuations
e. Exporters may be adversely impacted by tariffs placed on imports into the local country
9. Which of the following is not true of licensing?
a. Licensing allows a firm to purchase the right to manufacture and sell another firm’s
products within a specific country or set of countries.
b. The licensor is normally paid a royalty on each unit sold.
c. Licensors have considerable control the manufacturing and marketing of their products
marketed in foreign countries.
d. The licensee takes the risks and makes the investments in facilities for manufacturing,
marketing and distribution of goods and services.
e. Licensing is an increasingly popular entry mode for smaller firms with insufficient capital
and limited brand recognition.
10. Greenfield operations represent an appropriate entry if which of the following is true?
a. Entry barriers are low
b. Cultural differences are high
c. Entrant has limited multinational experience
d. Entrant is risk adverse
e. A and B only
11. Which of the following represent common law countries?
a. United Kingdom
b. Australia
c. India
d. Pakistan
e. All of the above
12. Which of the following represent common political and economic risks in entering an emerging
market?
a. Excessive local government regulation
b. Confiscatory tax rates
c. Lack of enforcement of contracts
d. Fluctuating exchange rates
13. The most common form of payment involving non-U.S. firms engaged in M&As is
a. Stock
b. Cash
c. Cash and stock
d. Debt
e. Cash, stock and debt
14. For an acquirer evaluating a target firm in another country, the target’s cash flows can be
expressed in which of the following ways?
a. Expressed in the home country’s currency
b. Local country’s currency
c. In real terms
d. A & B only
e. A, B, and C
15. Which of the following represent common components of the global capital asset pricing model
when applied to valuing firms in emerging countries?
a. Risk free rate of return
b. Specific country’s risk premium
c. Firm size risk premium
d. Emerging country firm’s global beta
Overcoming Political Risk in Cross-Border Transactions:
China’s CNOOC Invests in Chesapeake Energy
Cross-border transactions often are subject to considerable political risk. In emerging countries, this may
reflect the potential for expropriation of property or disruption of commerce due to a breakdown in civil
order. However, as Chinese efforts to secure energy supplies in recent years have shown, foreign firms
have to be highly sensitive to political and cultural issues in any host country, developed or otherwise.
In addition to a desire to satisfy future energy needs, the Chinese government has been under pressure to
tap its domestic shale gas deposits due to the clean burning nature of such fuels to reduce its dependence on
coal, the nation’s primary source of power. However, China does not currently have the technology for
recovering gas and oil from shale. In an effort to gain access to the needed technology and to U.S. shale gas
and oil reserves, China National Offshore Oil Corporation Ltd. in October 2010 agreed to invest up to
$2.16 billion in selected reserves of U.S. oil and gas producer Chesapeake Energy Corp. Chesapeake is a
leader in shale extraction technologies and an owner of substantial oil and gas shale reserves, principally in
the southwestern United States.
The deal grants CNOOC the option of buying up to a third of any other fields Chesapeake acquires in
the general proximity of the fields the firm currently owns. The terms of the deal call for CNOOC to pay
Chesapeake $1.08 billion for a one-third stake in a South Texas oil and gas field. CNOOC could spend an
additional $1.08 billion to cover 75 percent of the costs of developing the 600,000 acres included in this
field. Chesapeake will be the operator of the JV project in Texas, handling all leasing and drilling
operations, as well as selling the oil and gas production. The project is expected to produce as much as
500,000 barrels of oil daily within the next decade, about 2.5 percent of the current U.S. daily oil
consumption.
Having been forced in 2005 to withdraw what appeared to be a winning bid for U.S. oil company
Unocal, CNOOC stayed out of the U.S. energy market until 2010. The firm’s new strategy includes
becoming a significant partner in joint ventures to develop largely untapped reserves. The investment had
significant appeal to U.S. interests because it represented an opportunity to develop nontraditional sources
of energy while creating thousands of domestic jobs and millions of dollars in tax revenue. This investment
was particularly well timed, as it coincided with a nearly double-digit U.S. jobless rate; yawning federal,
state, and local budget deficits; and an ongoing national desire for energy independence. The deal makes
sense for debt-laden Chesapeake, since it lacked the financial resources to develop its shale reserves.
In contrast to the Chesapeake transaction, CNNOC tried to take control of Unocal, triggering what may
be the most politicized takeover battle in U.S. history. Chevron, a large U.S. oil and gas firm, had made an
all-stock $16 billion offer (subsequently raised to $16.5 billion) for Unocal, which was later trumped by an
all-cash $18.5 billion bid by CNOOC. About three-fourths of CNOOC's all-cash offer was financed
through below-market-rate loans provided by its primary shareholder: the Chinese government.
CNOOC's all-cash offer sparked instant opposition from members of Congress, who demanded a
lengthy review and introduced legislation to place even more hurdles in CNOOC's way. Hoping to allay
fears, CNOOC offered to sell Unocal's U.S. assets and promised to retain all of Unocal's workers,
something Chevron was not prone to do. U.S. lawmakers expressed concern that Unocal's oil drilling
technology might have military applications and CNOOC's ownership structure (i.e., 70 percent owned by
the Chinese government) would enable the firm to secure low-cost financing that was unavailable to
Chevron. The final blow to CNOOC's bid was an amendment to an energy bill passed in July requiring the
Departments of Energy, Defense, and Homeland Security to spend four months studying the proposed
takeover before granting federal approval.
Perhaps somewhat naively, the Chinese government viewed the low-cost loans as a way to "recycle" a
portion of the huge accumulation of dollars it was experiencing. While the Chinese remained largely silent
through the political maelstrom, CNOOC's management appeared to be greatly surprised and embarrassed
by the public criticism in the United States about the proposed takeover of a major U.S. company. Up to
that point, the only other major U.S. firm acquired by a Chinese firm was the 2004 acquisition of IBM's
personal computer business by Lenovo, the largest PC manufacturer in China.
Many foreign firms desirous of learning how to tap shale deposits from U.S. firms like Chesapeake and
to gain access to such reserves have invested in U.S. projects, providing a much-needed cash infusion. In
mid-2010, Indian conglomerate Reliance Industries acquired a 45 percent stake in Pioneer Natural
Resources Company’s Texas natural gas assets and has negotiated deals totaling $2 billion for minority
stakes in projects in the eastern United States. Norwegian oil producer Statoil announced in late 2010 that it
would team up with Norwegian oil producer Talisman Energy to buy $1.3 billion worth of assets in the
Eagle Ford fields, the same shale deposit being developed by Chesapeake and CNOOC.
Discussion Questions
1. Do you believe that countries should permit foreign ownership of vital scarce natural resources?
Explain your answer.
2. What real options (see Chapter 8) might be implicit in CNNOC’s investment in Chesapeake? Be
specific.
3. To what extent does the Chesapeake transaction represent the benefits of free global trade and
capital movements? In what way might it reflect the limitations of free trade?
4. Compare and contrast the Chesapeake and Unocal transactions. Be specific.
5. Describe some of the ways in which CNOOC could protect its rights as a minority investor in the
joint venture project with Chesapeake? Be specific.
InBev Buys An American Icon for $52 Billion
For many Americans, Budweiser is synonymous with American beer, and American beer is synonymous
with Anheuser-Busch. Ownership of the American icon changed hands on July 14, 2008, when beer giant
Anheuser Busch agreed to be acquired by Belgian brewer InBev for $52 billion in an all-cash deal. The
combined firms would have annual revenue of about $36 billion and control about 25 percent of the global
beer market and 40 percent of the U.S. market. The purchase is the largest in a wave of consolidation in the
global beer industry, reflecting an attempt to offset rising commodity costs by achieving greater scale and
purchasing power. While expecting to generate annual cost savings of about $1.5 billion, InBev stated
publicly that the transaction is more about the two firms being complementary rather than overlapping.
The announcement marked a reversal from AB's position the previous week when it said publicly that
the InBev offer undervalued the firm and subsequently sued InBev for "misleading statements" it had
allegedly made about the strength of its financing. To court public support, AB publicized its history as a
major benefactor in its hometown area (St. Louis, Missouri). The firm also argued that its own long-term
business plan would create more shareholder value than the proposed deal. AB also investigated the
possibility of acquiring the half of Grupo Modelo, the Mexican brewer of Corona beer that it did not
already own to make the transaction too expensive for InBev.
While it publicly professed to want a friendly transaction, InBev wasted no time in turning up the heat.
The firm launched a campaign to remove Anheuser's board and replace it with its own slate of candidates,
including a Busch family member. However, AB was under substantial pressure from major investors to
agree to the deal, since the firm's stock had been lackluster during the preceding several years. In an effort
to gain additional shareholder support, InBev raised its initial $65 bid to $70. To eliminate concerns over its
ability to finance the deal, InBev agreed to fully document its credit sources rather than rely on the more
traditional but less certain credit commitment letters.
In an effort to placate AB's board, management, and the myriad politicians who railed against the
proposed transaction, InBev agreed to name the new firm Anheuser-Busch InBev and keep Budweiser as
the new firm's flagship brand and St. Louis as its North American headquarters. In addition, AB would be
given two seats on the board, including August A. Busch IV, AB's CEO and patriarch of the firm's
founding family. InBev also announced that AB's 12 U.S. breweries would remain open.
By the end of 2010, the combined firms seemed to be progressing well, with the debt accumulated as a
result of the takeover being paid off faster than planned. Earnings per share exceeded investor expectations.
The sluggish growth in the U.S. market was offset by increased sales in Latin America. Challenges remain,
however, since AB Inbev still must demonstrate that it can restore growth in the U.S.
1
Discussion Questions:
1. Why would rising commodity prices spark industry consolidation?
2. Why would the annual cost savings not be realized until the end of the third year?
3. What is a friendly takeover? Speculate as to why it may have turned hostile?
Arcelor Outbids ThyssenKrupp for Canada's Dofasco Steelmaking Operations
Arcelor Steel of Luxembourg, the world's second largest steel maker, was eager to make an acquisition.
Having been outbid by Mittal, the world's leading steel firm, in its efforts to buy Turkey's state-owned
Erdemir and Ukraine's Kryvorizhstal, Guy Dolle, Arcelor's CEO, seemed determined not to let that happen
again. Arcelor and Dofasco had been in talks for more than four months before Arcelor decided to initiate a
tender offer on November 23, 2005, valued at $3.8 billion in cash. Dofasco, Canada's largest steel
manufacturer, owned vast coal and iron ore reserves, possessed a nonunion workforce, and sold much of its
steel to Honda assembly plants in the United States. The merger would enable Arcelor, whose revenues
were concentrated primarily in Europe, to diversify into the United States. Contrary to their European
operations, Arcelor found the flexibility offered by Dofasco's nonunion labor force highly attractive.
Moreover, by increasing its share of global steel production, Arcelor's management reasoned that it would
be able to exert additional pricing leverage with both customers and suppliers.
Serving the role of "white knight," Germany's ThyssenKrupp, the sixth largest steel firm in the world,
offered to acquire Dofasco one week later for $4.1 billion in cash. Dofasco's board accepted the bid, which
included a $187 million breakup fee should another firm acquire Dofasco. Investors soundly criticized
Dofasco's board for not opening up the bidding to an auction. In its defense, the board expressed concern
about stretching out the process in an auction over several weeks. In late December, Arcelor topped the
ThyssenKrupp bid by offering $4.2 billion. Not to be outdone, ThyssenKrupp matched the Arcelor offer on
January 4, 2006. The Dofasco board reaffirmed its preference for the ThyssenKrupp bid, due to the breakup
fee and ThyssenKrupp's willingness (unlike Arcelor) to allow Dofasco to continue to operate under its own
name and management.
In a bold attempt to put Dofasco out of reach of the already highly leveraged ThyssenKrupp, Arcelor
raised its bid to $4.8 billion on January 16, 2006. This bid represented an approximate 80 percent premium
over Dofasco's closing share price on the day Arcelor announced its original tender offer. The Arcelor bid
was contingent on Dofasco withdrawing its support for the ThyssenKrupp bid. On January 24, 2006,
ThyssenKrupp said it would not raise its bid. Events in the dynamically changing global steel market were
not to end here. The Arcelor board and management barely had time to savor their successful takeover of
Dofasco before Mittal initiated a hostile takeover of Arcelor. Ironically, Mittal succeeded in acquiring its
archrival, Arcelor, just six months later in a bid to achieve further industry consolidation.
Discussion Questions and Answers:
1. What were the motives for Arcelor’s and ThyssenKrupp’s interest in Dofasco?
2. What do you think was the logic underlying Arcelor and ThyssenKrupp’s bidding strategies?
Be specific.
3. Why do you believe that Dofasco’s share price rose above ThyssenKrupp’s offer price per
share immediately following the announcement of the bid?
4. Why do you believe that Dofasco’s board was concerned about a lengthy auction process?
discussion of the Mittal–Arcelor transaction.
Ford Sells Volvo to Geely in China’s Biggest Overseas Auto Deal
Despite a domestic car market in which car sales exceeded the U.S. market for the first time in 2009,
Chinese auto manufacturers moved aggressively to expand their international sales. In an effort to do so,
Zhejiang Geely Holding Company, China’s second largest non-government-owned car manufacturer,
acquired Ford’s money-losing Volvo operation in mid-2010 for $1.8 billion. The purchase price consisted
of a $200 million note and $1.6 billion in cash.
Geely sees this acquisition as a way of moving from being a maker of low-priced cars affordable in the
Chinese mass market to selling luxury cars and penetrating the European car market. Geely has publicly
stated that it hopes to have one-half of its revenue coming from international sales by 2015. With 2,500
dealerships in more than 100 countries, acquiring Volvo is seen as a significant first step in achieving this
goal.
As part of the agreement, Ford will continue to sell Volvo engines and other components and to provide
engineering and technology support for an unspecified period. Geely intends to maintain car production in
Sweden and to build another factory in China within the next several years.
Discussion Questions
1. With the world’s largest and fastest-growing domestic car market, why do you believe Chinese
carmakers are interested in expanding internationally?
2. What factors are likely to motivate Geely and other Chinese carmakers to ensure strict
enforcement of intellectual property laws?
Cadbury Buys Adams in a Sweet Deal
Cadbury Schweppes PLC is a confectionary and beverage company headquartered in London, England.
Cadbury Schweppes (Cadbury) acquired Adams Inc., a chewing gum manufacturer, from Pfizer
Corporation in 2003 for $4.2 billion. The acquisition enables Cadbury to gain access to new markets,
especially in Latin America. The purchase also catapulted Cadbury to the top spot in the global
confectionary market. Adams's major brands are in the fastest growing segments of the global market and
complement Cadbury's existing chocolate business.
Cadbury bought 100 percent of the business of the Adams Division of Pfizer. The decision whether to
transfer assets or stock depended on which gave Cadbury and Pfizer optimum tax advantages. Furthermore,
many employees had positions with both the parent and the operating unit. In addition, the parent supplied
numerous support services for its subsidiary. While normal in the purchase of a unit of a larger company,
this purchase was complicated by Adams operating in 40 countries representing 40 legal jurisdictions.
Cadbury and Pfizer representatives agreed on a single asset and stock sale and purchase agreement (i.e.,
the master agreement), which transferred the relevant U.S. assets and stock in Adams's subsidiaries to
Cadbury. The master agreement contained certain overarching terms, including closing conditions,
representations and warranties, covenants, and indemnification clauses that applied to all legal jurisdictions.
However, the master agreement required Pfizer or Adams to enter into separate local "implementation"
agreements. This was done to complete the transfer of either Adams's assets in non-U.S. jurisdictions or
shares in non-U.S. Adams's subsidiaries to local Cadbury subsidiaries depending on which provided the
most favorable tax advantages and where necessary to accommodate differences in local legal conditions.
The parties entered into more than 20 such agreements to transfer asset and stock ownership. All the
agreements used the master agreement as a template. Written in English, the various contracts were
governed by New York law, the state in which Pfizer is headquartered, except where there was a
requirement that the law governing the contract be that of the local country.
A team of 5 Cadbury in-house lawyers and 40 outside attorneys conducted the legal review. Cadbury
staff members carried out separate environmental due diligence exercises, because Adams had long-
standing assets in the form of plant and machinery in each of 22 factories in 18 countries. Cadbury filed
with antitrust regulators in a number of European and non-European countries, including Germany, the
Czech Republic, Turkey, Greece, Italy, Portugal, Spain, the United Kingdom, South Africa, and Brazil. The
requirements varied in each jurisdiction. It was necessary to obtain regulatory clearance before closing in
countries where prenotification was required. The master agreement was conditional on antitrust regulatory
approval in the United States, Canada, and Mexico, Adams's largest geographic markets.
Cadbury wanted all 12,900 Adams employees across 40 countries to transfer to it with the business.
However, because not all of them were fully dedicated Adams employees (i.e., some had both Adams and
Pfizer functions), it was necessary to determine on a site-by-site basis which employees should remain with
Pfizer and which should transfer to Cadbury. Partly due to the global complexity of the deal, the preclosing
and closing meetings lasted three full days and nights. The closing checklist was 129 pages long (Birkett,
2003).
Discussion Questions
1 Discuss how cross-border transactions complicate the negotiation of the agreement of purchase
and sale as well as due diligence. Be specific.
2 How does the complexity described in your answer to the first question add to the potential risk of
the transaction? Be specific.
3 What conditions would you, as a buyer, suggest be included in the agreement of purchase and sale
that might minimize the potential risk mentioned in your answer to the second question? Be
specific.
Vodafone AirTouch Acquires Mannesmann in a Record-Setting Deal
On February 4, 2000, Vodafone AirTouch PLC, the world's largest wireless communications company,
agreed to buy Mannesmann AG in a $180.0 billion stock swap. At that time, the deal was the largest
transaction in M&A history. The value of this transaction exceeded the value of the AOL Time Warner
merger at closing by an astonishing $74 billion. Including $17.8 billion in assumed debt, the total value of
the transaction soared to $198 billion. After a protracted and heated contest with Mannesmann's
management as well as German labor unions and politicians, the deal finally closed on March 30, 2000. In
this battle of titans, Klaus Esser, CEO of Mannesmann, the German cellular phone giant, managed to
squeeze nearly twice as much money as first proposed out of Vodafone, the British cellular phone
powerhouse. This transaction illustrates the intricacies of international transactions in countries in which
hostile takeovers are viewed negatively and antitakeover laws generally favor target companies. (See
Chapter 3 for a more detailed discussion of antitakeover laws.)
Vodafone AirTouch Corporate Profile
Vodafone AirTouch, itself the product of a $60 billion acquisition of U.S.-based AirTouch
Communications in early 1999, is focused on becoming the global leader in wireless communication.
Although it believes the growth opportunities are much greater in wireless than in wired communication
systems, Vodafone AirTouch has pursued a strategy in which customers in certain market segments are
offered a package of integrated wireless and wired services. Vodafone AirTouch is widely recognized for
its technological innovation and pioneering creative new products and services. Vodafone has been a global
leader in terms of geographic coverage since 1986 in terms of the number of customers, with more than 12
million at the end of 2000. Vodafone AirTouch's operations cover the vast majority of the European
continent, as well as potentially high-growth areas such as Eastern Europe, Africa, and the Middle East.
Vodafone AirTouch's geographic coverage received an enormous boost in the United States by entering
into the joint venture with Bell Atlantic. Vodafone AirTouch has a 45 percent interest in the joint venture.
The JV has 23 million customers (including 3.5 million paging customers). Covering about 80 percent of
the U.S. population, the joint venture offers cellular service in 49 of the top 50 U.S. markets and is the
largest wireless operator in the United States.
Mannesmann's Corporate Profile
Mannesmann is an international corporation headquartered in Germany and focused on the
telecommunications, engineering, and automotive markets. Mannesmann transformed itself during the
1990s from a manufacturer of steel pipes, auto components, and materials-handling equipment into
Europe's biggest mobile-phone operator. Rapid growth in its telecom activities accounted for much of the
growth in the value of the company in recent years.
Strategic Rationale for the Merger
With Mannesmann, Vodafone AirTouch intended to consolidate its position in Europe and undertake a
global brand strategy. In Europe, Vodafone and Mannesmann would have controlling stakes in 10
European markets, giving the new company the most extensive European coverage of any wireless carrier.
Vodafone AirTouch would benefit from the additional coverage provided by Mannesmann in Europe,
whereas Mannesmann's operations would benefit from Vodafone AirTouch's excellent U.S. geographic
coverage. The merger would create a superior platform for the development of mobile data and Internet
services.
Mannesmann's "Just-Say-No" Strategy
What supposedly started on friendly terms soon turned into a bitter battle, involving a personal duel
between Chris Gent, Vodafone's CEO, and Klaus Esser, Mannesmann's CEO. In November 1999,
Vodafone AirTouch announced for the first time its intention to make a takeover bid for Mannesmann.
Mannesmann's board rebuked the overture as inadequate, noting its more favorable strategic position. After
the Mannesmann management had refused a second, more attractive bid, Vodafone AirTouch went directly
to the Mannesmann shareholders with a tender offer. A central theme in Vodafone AirTouch's appeal to
Mannesmann shareholders was what it described as the extravagant cost of Mannesmann's independent
strategy. Relations between Chris Gent and Klaus Esser turned highly contentious. The decision to
undertake a hostile takeover was highly risky. Numerous obstacles stood in the way of foreign acquirers of
German companies.
Culture Clash
Hostile takeovers of German firms by foreign firms are rare. It is even rarer when it turns out to be one of
the nation's largest corporations. Vodafone AirTouch's initial offer immediately was decried as a job killer.
The German tabloids painted a picture of a pending bloodbath for Mannesmann and its 130,000 employees
if the merger took place. Vodafone AirTouch had said that it was interested in only Mannesmann's
successful telecommunications operations and it was intending to sell off the company's engineering and
automotive businesses, which employ about 80 percent of Mannesmann's total workforce. The prospect of
what was perceived to be a less caring foreign firm doing the same thing led to appeals from numerous
political factions for government protection against the takeover.
German law at the time also stood as a barrier to an unfriendly takeover. German corporate law required
that 75 percent of outstanding shares be tendered before control is transferred. In addition, the law allows
individual shareholders to block deals with court challenges that can drag on for years. In a country where
hostile takeovers are rare, public opinion was squarely behind management.
To defuse the opposition from German labor unions and the German government, Chris Gent said that
the deal would not result in any job cuts and the rights of the employees and trade unions would be fully
preserved. Moreover, Vodafone would accept fully the Mannesmann corporate culture including the
principle of codetermination through employee representation on the Mannesmann supervisory board.
Because of these reassurances, the unions decided to support the merger.
The Offer Mannesmann Couldn't Refuse
When it became clear that Vodafone's attempt at a hostile takeover might succeed, the Mannesmann
management changed its strategy and agreed to negotiate the terms for a friendly takeover. The final
agreement was based on an improved offer for Mannesmann shareholders to exchange their shares in the
ratio of 58.96 Vodafone AirTouch shares for 1 Mannesmann share, an improvement over the previous offer
of 53.7 to 1. Furthermore, the agreement defined terms for the integration of the two companies. For
example, Dusseldorf was retained as one of two European headquarters with responsibility for
Mannesmann's existing continental European mobile and fixed-line telephone business. Moreover, with the
exception of Esser, all Mannesmann's top managers would remain in place.
Epilogue
Throughout the hostile takeover battle, Vodafone AirTouch said that it was reluctant to offer Mannesmann
shareholders more than 50 percent of the new company; in sharp contrast, Mannesmann said all along that
it would not accept a takeover that gives its shareholders a minority interest in the new company. Esser
managed to get Mannesmann shareholders almost 50 percent ownership in the new firm, despite
Mannesmann contributing only about 35 percent of the operating earnings of the new company.
Vodafone, currently the world's largest (by revenue) cell phone service provider, has experienced
continuing share price erosion amidst intensifying price erosion from competition in western European
markets and new technologies, such as Internet calling, that are slowing revenue growth and shrinking
profit margins. Shares in Vodafone have underperformed the UK market by 40 percent since the firm
acquired Mannesmann. In 2006, the company recorded an impairment charge of $49 billion. This charge
reflected the lower current value of the Mannesmann assets acquired by Vodafone in 2000, effectively
making it official that the firm substantially overpaid for Mannesmann.
While hostile bids were relatively rare at the time of the Vodafone–Mannesmann transaction, they have
become increasingly more common in recent years. Since 2002, Europe has seen more hostile or
unsolicited deals than in the United States. In part, Europe is simply catching up to the United States after
many years in which there were virtually no hostile bids. For years, national governments and regulators in
Europe had been able to deter easily cross-border deals that they felt could threaten national interests, even
though European Union rules are supposed to allow a free and fair market within its jurisdiction. However,
the rise of big global rivals, as well as a rising tide of activist investors, is making companies more
assertive.
Case Study Discussion Questions:
1. Who do you think negotiated the best deal for their shareholders, Chris Gent or Klaus Esser? Explain
your answer in terms of short and long-term impacts.
2. Both firms were pursuing a similar strategy of expanding their geographic reach. Does this strategy
make sense? Why/why not? What are the risks associated with this strategy?
3. Do you think the use of all stock, rather than cash or a combination of cash and stock, to acquire
Mannesmann helped or hurt Vodafone AirTouch’s shareholders? Explain your answer.
4. Do you think that Vodafone AirTouch conceded too much to the labor unions and Mannesmann’s
management to get the deal done? Explain your answer.
5. What problems do you think Vodafone AirTouch might experience if they attempt to introduce what
they view as “best operating practices” to the Mannesmann culture? How might these challenges be
overcome? Be specific.
Political Risk in Cross-Border Transactions—CNOOC's Aborted
Attempt to Acquire Unocal
In what may be the most politicized takeover battle in U.S. history, Unocal announced on August 11, 2005,
that its shareholders approved overwhelmingly the proposed buyout by Chevron. The combined companies
would produce the equivalent of 2.8 million barrels of oil per day and the acquisition would increase
Chevron's reserves by about 15 percent. With both companies owning assets in similar regions, it was
easier to cut duplicate costs. The deal also made Chevron the top international oil company in the fast
growing Southeast Asia market. Unocal is much smaller than Chevron. As a pure exploration and
production company, Unocal had operations in nine countries. Chevron operated gas stations, drilling rigs,
and refineries in 180 countries.
Sensing an opportunity, Chevron moved ahead with merger talks and made an all-stock $16 billion offer
for Unocal in late February 2005. Unocal rebuffed the offer as inadequate and sought bids from China's
CNOOC and Italy's ENI SPA. While CNOOC offered $17 billion in cash, ENI was willing to offer only
$16 billion. Chevron subsequently raised its all-stock offer to $16.5 billion, in line with the board's
maximum authorization. Hours before final bids were due, CNOOC informed Unocal it was not going to
make any further bids. Believing that the bidding process was over, Unocal and Chevron signed a merger
agreement on April 4, 2005. The merger agreement was endorsed by Unocal's board and cleared all
regulatory hurdles. Despite its earlier reluctance, CNOOC boosted its original bid to $18.5 billion in late
June to counter the Chevron offer. About three fourths of CNOOC's all-cash offer was financed through
below-market-rate loans provided by its primary shareholder, the Chinese government. On July 22, 2005,
Chevron upped its offer to $17.7 billion, of which about 60 percent was in stock and 40 percent in cash. By
the time Unocal shareholders actually approved the deal, the appreciation in Chevron's stock boosted the
value of the deal to more than $18.1 billion.
CNOOC's all-cash offer of $67 per share in June sparked instant opposition from members of Congress,
who demanded a lengthy review by President George W. Bush and introduced legislation to place even
more hurdles in CNOOC's way. Hoping to allay fears, CNOOC offered to sell Unocal's U.S. assets and
promised to retain all of Unocal's workers, something Chevron was not prone to do. CNOOC also argued
that its bid was purely commercial and not connected in any way with the Chinese government. U.S.
lawmakers expressed concern that Unocal's oil drilling might have military applications and CNOOC's
ownership structure (i.e., 70 percent owned by the Chinese government) would enable the firm to secure
low-cost financing that was unavailable to Chevron. The final blow to CNOOC's bid was an amendment to
an energy bill passed in July requiring the Departments of Energy, Defense, and Homeland Security to
spend four months studying the proposed takeover before granting federal approval.
Perhaps somewhat naively, the Chinese government viewed the low-cost loans as a way to "recycle" a
portion of the huge accumulation of dollars it was experiencing. While the Chinese remained largely silent
through the political maelstrom, CNOOC's management appeared to be greatly surprised and embarrassed
by the public criticism in the United States about the proposed takeover of a major U.S. company. Up to
that point, the only other major U.S. firm acquired by a Chinese firm was the 2004 acquisition of IBM's
personal computer business by Lenovo, the largest PC manufacturer in China. While the short-term effects
of the controversy appear benign, the long-term implications are less clear. It remains to be seen how well
international business and politics can coexist between the world's major economic and military
superpower and China, an emerging economic and military superpower in its own right.
Cross-border transactions often require considerable political risk. In emerging countries, this is viewed
as the potential for expropriation of property or disruption of commerce due to a breakdown in civil order.
However, as CNOOC's aborted effort to takeover Unocal illustrates, foreign firms have to be highly
sensitive to political and cultural issues in any host country, developed or otherwise.
Discussion Questions:
1. Should CNNOC have been permitted to buy Unocal? Why? Why not?
2. How might the Chinese have been able to persuade U.S. regulatory authorities to approve
the transaction?
3. The U.S. and European firms are making substantial investments (including M&As) in China.
How should the Chinese government react to this rebuff?
