Chapter 19 Cross-Border Mergers and Acquisitions:
Analysis and Valuation
Answers to End of Chapter Discussion Questions
18.1 Discuss the circumstances under which a non-U.S. buyer may choose a U.S. corporate
structure as its acquisition vehicle. A limited liability company? A partnership?
Answer: A C corporation is the typical acquisition vehicle used by foreign buyers of U.S.
businesses due to its flexibility. C corporations are relatively easy to organize quickly, since all
states permit such structures and no prior governmental approval is required. There is no
limitation on non-U.S. persons or entities acting as shareholders in U.S. corporations, except for
certain regulated industries. The C corporation also allows for limited liability (i.e., limited to the
18.2 What factors influence the selection of which tax rate to use (i.e., the target’s or the
acquirer’s) in calculating the weighted average cost of capital in cross-border transactions?
Answer: Marginal corporate tax rates vary significantly among countries. Consequently, the
question of whether the acquirer or target’s marginal tax rate should be used is complex. However,
certain guidelines may be followed. In general, the appropriate marginal tax rate used in
18.3 Discuss adjustments commonly made in estimating the cost of debt in emerging countries.
Answer: When a local bond rate is not available, the cost of debt for a specific firm may be
estimated by adjusting the U.S. Treasury bond rate. The cost of debt for an emerging market
18.4 Find an example of a recent cross-border transaction in the business section of a newspaper.
Discuss the challenges an analyst might face in valuing the target firm.
Answer: Walmart acquired Grupa Cifra, Mexico’s largest retail store chain, in 1997. In addition
to the risk free rate of return, the firm’s cost of equity (ke) should be adjusted for such factors as
18.5. Discuss the various types of adjustments for risk that might be made to the global CAPM
before valuing a target firm in an emerging country. Be specific.
Answer: To estimate the cost of equity for a firm in an emerging economy (ke,em), the domestic
CAPM can be modified for specific country risk as follows:
ke,em = Rf + ßemfirm,global (Rcountry – Rf) + FSP + CRP
where
18.6 Do you see the growth in Sovereign Wealth Funds (SWFs) as important sources of capital to the
M&A market or as a threat to the sovereignty of the countries in which they invest? Explain your
answer.
Answer: SWFs represent an important source of recycling capital from abroad to satisfy the needs
of domestic capital markets. SWFs have had a propensity to be long-term investors and, as such,
are not subject to “flight risk” as are more speculative forms of capital. In this regard, SWFs
18.7 What are the primary factors contributing to the increasing integration of the global capital
markets? What factors could derail the trend toward globalization?
Answer: Factors contributing to the integration of global capital markets include the reduction in
trade barriers, removal of capital controls, the harmonization of tax laws (which reduce the impact
of different tax rates on trade and investment), floating exchange rates, and the free convertibility
18.8 Give examples of economic and political risk that you could reasonably expect to encounter in
acquiring a firm in an emerging economy.
Answer: Examples of political and economic risk include excessive local government regulation,
confiscatory tax policies, restrictions on cash remittances, currency inconvertibility, restrictive
18.9 During the 1980s and 1990s, changes in the S&P 500 (a broadly diversified index of U.S. stocks)
were about 50 percent correlated with the MSCI EAFE Index (a broadly diversified index of
European and other major industrialized countries stock markets). In recent years, the correlation
has increased to more than 80 percent. Why? If an analyst wishes to calculate the cost of equity,
which index should they use in estimating the equity risk premium?
Answer: The free flow of information and capital among the world’s major capital markets
ensures that small differences in risk-adjusted returns in one market will induce significant inflows
18.10 Comment on the following statement: “The conditions for foreign buyers interested in U.S. targets
could not be more auspicious. The dollar is weak, M&A financing is harder to come by for
financial sponsors (private equity firms), and many strategic buyers in the U.S. are hard-pressed to
make acquisitions at a time when earnings targets are being missed.”
Answer: A weak dollar makes U.S. targets cheaper when valued in terms of foreign currency.
Also, the competition for U.S. targets is lessened by a withdrawal of private equity firms and in
Solutions to End of Chapter Case Study Questions
TAKEDA’S HIGH RISK BET TO CHANGE
ITS STRATEGY AND CORPORATE CULTURE
Discussion Questions:
1. What are the key assumptions implicit in Takeda’s takeover of Shire? Which do you believe are the
most
critical? Be Specific.
Answer: Key assumptions can be categorized as to those over which management has some degree of
control and those which are uncontrollable. Assumptions over which management has some degree of
2. What alternatives to acquisition could Takeda have pursued to achieve its strategic objectives?
Speculate as to why a takeover was the preferred option?
Answer: Takeda could have pursued a “go it alone strategy” or a partnership as alternatives to a
merger. However, the former could have been viewed as too expensive and risky. Partnerships
required shared control and profit and often are hard to negotiate and fail as partner expectations
diverge over time. Takeda also could have grown by taking non-controlling interests in regional
3. Which investor reaction do you think was more accurate: the immediate negative reaction when the
deal was announced or the more positive one when the deal closed? Explain your answer.
Answer: The initial investor reaction which was to sell Takeda’s shares may have been the more
appropriate response. The burden of repaying the mountain of debt Takeda either assumed or borrowed
to finance the purchase price will limit the ability of the combined firms to reinvest in its operations
4. Speculate as to why the initial Takeda offer for Shire was all cash and the final offer was a
combination of cash and stock? Explain your answer.
Answer: Cross-border deals often involve mostly cash reflecting possible concern among target
shareholders about the value of value and liquidity of acquirer shares and the potential loss due to
exchange rate fluctuations when such shares are sold. Takeda may also have been concerned about the
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
False
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
e. All of the above
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
Short Essay Questions
SHAREHOLDER ANGST CAUSES BREAKUP OF MERGER
AND LONGSTANDING JOINT VENTURE
______________________________________________________________________________
Key Points: This case illustrates
• The challenges of managing international joint ventures,
• The importance of transparency for investors in complicated deal announcements,
• The potential impact of activist investors on changing corporate strategies, and
• The sensitivity of the size of purchase price premiums to key assumption changes.
____________________________________________________________________________
The merger is dead! This was the resounding message in a June 25, 2018 letter from Xerox Corp.’s (Xerox)
CEO John Visentin to his counterpart at Fujifilm. He also made it clear that Xerox would not renew the
decades-old Fuji Xerox joint venture in 2021. Visentin was appointed to the position on May 2, 2018 when
the then CEO Jeff Jacobson and six other board members resigned in a settlement with two of the firm’s
biggest investors, Carl Icahn and Darwin Deason, who together own about 15% of the firm’s stock. In
attempting to kill the merger, Messrs. Icahn and Deason alleged that it undervalued Xerox and threatened a
Xerox has been in the midst of a downward spiral for years. The document management1 and workflow2
hardware and software markets have become increasingly competitive, with a number of smaller firms
offering better, cheaper solutions than industry leaders such as Japan’s Fujifilm, US based Xerox, and their
joint venture Fuji Xerox. The JV is 75% owned by Fujifilm, with the remainder owned by Xerox, and sells
The 56 year old JV received unwanted attention in 2017 for mismanagement and accounting scandals.
Messrs. Icahn and Deason began to push for renegotiating or scrapping the JV and for removing Xerox
CEO Jeffery Jacobson and making board changes, because they had not been able to make changes in the
JV more favorable to Xerox. Fujifilm, which generates about 45% of its operating profit from the JV, has
been able to offset declining demand for its printer and copier hardware by altering its product and market
mix. Differing views about the JVs future created friction between Fujifilm management and Xerox
investors.
These events culminated in an agreement between Fujifilm and Xerox to create a new company
consisting of the Fuji Xerox joint venture and Xerox. The new firm was to be named Fuji Xerox. For
Fujifilm, the merger presented an opportunity to shore up the JV by cutting costs and improving revenue
growth. For Xerox, the merger offered the prospect of maximizing shareholder value. According to the
terms of the deal, Fujifilm would contribute its 75% ownership stake in Fuji Xerox valued at $6.1 billion to
the new company in exchange for a 51% ownership position. Xerox shareholders would receive a special
cash dividend of $2.5 billion amounting to $9.80 per share and would own 49.9% of the new firm. The new
Cost savings were to be achieved by cutting 10,000 jobs (20% of the JV’s workforce) and by closing a
number of manufacturing facilities. Although the merger announcement provided specific cost savings
projections, none were provided for revenue. Table 19.1 illustrates the range of possible premium estimates
for Xerox shareholders implicit in the deal terms outlined in the merger announcement: the premium could
be almost 50% if the merger realizes 100% of the anticipated cost savings or as low as about 11% if only
one-half of the savings were realized.
Both Fujifilm’s and Xerox’s share prices fell immediately following the January merger announcement.
Table 19.1 Estimating the Purchase Price Premium
Optimistic Case (100% of Synergy Realized)
Total Market Value of Fuji Xerox JV
Market Value of the Fuji Xerox JV ($Billions)3
8.13
PV of Cost Savings, incl. cash integration expenses ($Billions)4
12.89
Total Market Value of JV, Incl. 100% of synergy ($Billions)
21.02
Total Offer Price for Xerox
Upfront Dividend to Xerox Shareholders ($Billions)
2.50
Xerox 49% Stake in Fuji Xerox JV, incl. minority discount ($Billions)5
9.36
Total Offer Price ($Billions)
11.86
Purchase Price Premium (%)6
49.20
Pessimistic Case (50% of Synergy Realized)
Total Market Value of Fuji Xerox JV
Market Value of Fuji Xerox JV ($Billions)
8.13
PV of Cost Savings, incl. cash integration expenses ($Billions)7
6.01
Total Market Value of Fuji Xerox JV, assuming 50% of synergy ($Billions)
14.14
Total Offer Price for Xerox
Upfront Dividend to Xerox Shareholders ($Billions)
2.50
Xerox 49% Stake in Fuji Xerox JV, incl. minority discount ($Billions)8
6.30
Total Offer Price ($Billions)
8.80
Purchase Price Premium (%)9
10.60
Assumptions:
(1) Fujifilm’s $6.1 billion valuation of their contributed 75% stake in the Fuji Xerox JV is assumed to
include a control premium (See Chapter 10).
(2) The $1.4 billion in integration and restructuring costs consist of $1 billion in actual cash expenses and
(3) Xerox share price (unaffected by merger speculation) prior to merger announcement was $30 on
(6) 265 million fully diluted Xerox shares outstanding at the time of the merger announcement.
(7) Revenue growth is minimal.
THE ROLE OF M&As IN CHINA’S INDUSTRIAL POLICY:
3 Market value of Fuji Xerox JV = $6.1 billion / .75 = $8.13 billion
4 PV (cost savings) = -$.50/(1.10) + ($1.2-$.5)/(1.10)2 + ($1.7/.10)/(1.10)3 = –$.46 + .$58 + $12.77 =
$12.89 billion
5 Value of Xerox share of JV = $21.02 x (1-.091) x .49 = $9.36 billion
CHEMCHINA ACQUIRES SYNGENTA
_____________________________________________________________
Case Objectives: To illustrate how
• Government policy goals and regulations can have an important role in shaping both domestic and
foreign takeovers,
______________________________________________________________________________
After stunning the world with a record $246 billion of announced foreign takeovers in 2016, the level of
China’s foreign acquisitions tapered off in 2017, in part because Chinese dealmakers struggled to finance
deals due to tighter capital controls imposed by the Chinese government. While China’s reserves of foreign
currencies topped $3.2 trillion at the end of 2017, they are down from their all-time high in mid-2014 of
$3.9 trillion. Outflows of Chinese capital necessitate exchanging Chinese yuan for foreign currencies. If
Cooling Chinese companies’ appetite for foreign targets has become a high priority for the Chinese
government to help stem capital flight and stabilize the country’s currency. Some observers speculate that
government regulators are actively discouraging large purchases of foreign firms in industries other than
the acquirer’s core business. Deals considered important by the government for Chinese economic
development are less likely to be affected by capital controls. The most recent example of this is the
country’s biggest-ever overseas purchase of Switzerland-based seed manufacturer Syngenta AG by China
National Chemical Corp. (ChemChina) for $43 billion. ChemChina is China’s largest state-owned chemical
company whose sales include agrochemicals,10 rubber products, specialty chemicals, industrial equipment,
The transaction closed on June 8, 2017, with ChemChina owning 94.7% of Syngenta’s total shares
outstanding. ChemChina first approached Syngenta about a buyout in February 2016 but was unable to
close the deal for 16 months due to a series of regulatory hurdles in the U.S., European Union, and several
other countries. To gain approval, ChemChina had to agree to divest certain key product lines that were
deemed anticompetitive by foreign regulators. The deal required approval by the Committee on Foreign
Investment in the United States (CFIUS) due to potential safety and security concerns. In August 2016,
CFIUS approved the transaction. The deal was approved by the Australian Competition and Consumer
Commission in December 2016; European and U.S. antitrust regulators approved the deal in April 2017.
The acquisition of Syngenta allows ChemChina to enhance its technical knowhow, ensure greater food
Integrating the Swiss firm into its operations is likely to prove daunting. Implementing the combined
firms’ business strategy must still overcome differences in national laws, regulations, and corporate
governance between Beijing-based ChemChina and Syngenta, which is to retain its headquarters in Basel,
Switzerland. ChemChina must manage the effort to expand Syngenta’s seed and pesticide business in
China’s fragmented and inefficient agricultural sector while attempting to minimize job losses at small
domestic firms to avoid local unrest. The firm must also minimize the potential exodus of talent at the
There was ample reason to believe that ChemChina was already overextended financially even before
the takeover of Syngenta. While ChemChina is unlisted, reports indicate that the firm has lost money every
year since 2012. Moody’s Investors Service has threatened to downgrade the firm to below investment
grade, an event that would materially add to the firm’s cost of debt. Moody’s estimated that ChemChina
debt-to-EBITDA ratio increased to 11.4 in 2017 compared to 8.6 at the end of 2016. To reduce its leverage,
ChemChina has approached government investment funds, private equity firms, and sovereign funds
seeking additional capital. As of yearend 2017, the firm had received an equity infusion of $5 billion from
government owned banks. The firm’s use of SPVs makes it difficult to assess accurately if the firm is
adequately capitalized given the seasonal and cyclical nature of its business.
Discussion Questions:
1. What are the advantages and disadvantages of ChemChina, the acquirer, being a government
owned enterprise?
Answer: As a state owned enterprise in an industry that was designated by the Chinese
government as critical to the future development of the country, ChemChina’s proposal to
11 A special purpose vehicle is a subsidiary of the parent with its own balance sheet and legal status that
makes its obligations secure even if the parent goes bankrupt. The SPV can borrow money and
subsequently transfer the proceeds to the parent in exchange for certain parent assets or equity. Often such
transfers take the form of intercompany loans at a market rate of interest between the SPV and the parent.
2. In 2017, the global economies and financial markets were characterized by historically low
interest rates, flat to falling agricultural commodity prices, and lackluster economic growth. Does
the use of large amounts of debt to finance the deal make sense in the conditions prevailing in
2017? Be specific.
Answer: Abnormally low interest rates encourage the use of debt as a primary source of funds in
financing a takeover. However, the amount borrowed can become excessive in that the borrower
cannot generate sufficient cash flow to meet required interest and principal payments.
3. Why did ChemChina use cash rather than equity or some combination of equity and cash to
acquire Syngenta?
Answer: ChemChina’s stock would be hard to value and difficult to sell in the absence of liquid
4. What are the key assumptions implicit in ChemChina’s takeover of Syngenta? Which do you
believe are the most critical? Be Specific.
Answer: The firm’s willingness to assume so much debt suggests that ChemChina’s
management is assuming that the combined firms can generate sufficient future cash flow
to meet principal and interest repayment on a timely basis. This in turn assumes that the demand
5. What alternatives to acquisition could ChemChina have pursued? Speculate as to why a
takeover was the preferred option?
Answer: ChemChina could have pursued a “go it alone strategy” or a partnership as
alternatives to an acquisition. However, the former could have been viewed as too
expensive and risky. Partnerships require shared control and profit and often are hard to
Discussion Questions:
1. What are the advantages and disadvantages of ChemChina, the acquirer, being a government
owned enterprise?
2. In 2017, the global economies and financial markets were characterized by historically low
3. Why did ChemChina use cash rather than equity or some combination of equity and cash to
acquire Syngenta?
4. What are the key assumptions implicit in ChemChina’s takeover of Syngenta? Which do you
believe are the most critical? Be Specific.
CHIP INDUSTRY CONSOLIDATION
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Key Points
• Industry consolidation often is an important factor in triggering merger waves.
• Market value can be grown dramatically through an aggressive and well executed acquisition
strategy
• Differences in corporate tax rates among countries can give foreign acquirers an edge in acquiring
domestic firms
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With a market value of less than $3.5 billion, chip maker Avago Technologies (Avago) was viewed as a
modest competitor in the semiconductor industry when it went public in 2009. By 2015, the firm’s market
value exploded to $35 billion. The rapid expansion of the firm’s market value in six years reflected its
successful growth through acquisition strategy.
Avago’s strategy emphasizes acquiring complementary businesses, quickly paring overlapping costs,
and selling off businesses no longer critical to its growth plan. In the past four years, Avago acquired five
The aggressive pace of acquisitions was fueled by historically low cost debt financing during this
period, a rapidly appreciating share price, and low tax rates. Avago’s share price has grown at an
approximate 39% compound annual average rate since its 2009 IPO when it traded at $17.38 per share
before rising to $128.48 in mid-2015. The rapid growth in its share price has made its stock attractive to
target firm shareholders and as such a solid acquisition currency.
On May 28, 2015, Avago announced its biggest deal ever and the largest in the history of the
semiconductor industry when it purchased Broadcom Technologies (Broadcom) for $37 billion offering the
The latest acquisition by Avago illustrates the wave of consolidation that swept over the computer chip
industry. In recent years chip makers have turned to buying growth to cut costs using mergers to combine
sales forces and back end operations. By achieving larger scale, the chip makers can remain attractive to
The Broadcom and Avago merger closed in March 2016. Since Broadcom was acquired by a foreign
incorporated business, the combined firms can have tax free access to Broadcom’s foreign cash holdings
and earnings and the ability to reduce the tax rate through “earnings stripping.” Earnings stripping refers to
a U.S. subsidiary of a foreign firm paying excessively high interest on loans from its parent or selling its
MAJOR REGULATORY AND INTEGRATION HURDLES FOR THE ANHEUSER-BUSCH
INBEV AND SABMILLER MERGER
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Case Objectives: To illustrate challenges common to cross-border M&As including
• Regulatory obstacles;
• Challenges of postmerger integration efforts; and
• The impact of regulatory and postmerger considerations on recovering the purchase price
premium.
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While the motives that drive cross-border deals may be compelling, the challenges of closing and
postmerger integration often are underestimated, especially if the participants are doing business in many
different countries. Closing such deals involves getting approval from regulators in multiple countries,
which can be time-consuming and expensive. In developed countries, antitrust law usually is well
Actions required to gain regulatory approval usually involve selling off some portion of the combined
business in countries where increased concentration is a concern. In doing so, the economics of the deal
may be changed profoundly, especially when the assets to be divested represent a significant portion of the
anticipated synergies resulting from combining the firms. The greatest synergy often comes from buying
businesses whose operations in a country are complementary to those of the acquirer. For example, by
Once regulatory approval is achieved, integrating the target’s operations with those of the acquirer can
be even more challenging than dealing with regulators. Labor laws in developed and emerging countries
may limit the acquirer’s ability to terminate “redundant” workers or allow acquirers to do so only at great
expense. Country cultures may also inhibit the ability of the acquirer to introduce more modern
management, production, and distribution methods. All of these factors contribute to delaying and possibly
preventing realization of anticipated synergies.
The following narrative describes global beer industry leader Anheuser-Busch InBev’s (AB InBev)
2016 takeover of the second largest beer company SABMiller. The combined firms’ leadership position
should result in lower relative costs than competitors due to economies of scale, brand recognition, and the
ability to negotiate lower raw material costs. The new firm could also experience greater pricing power
because of brand recognition and differentiation.
With market growth tepid overall and declining in some regions, the global beer industry is undergoing
major changes as people in many developed countries are turning to locally brewed craft beer.
Furthermore, future growth globally is expected to come mainly in emerging countries and in regions such
as Africa.
Historically, AB InBev has used acquisitions to increase profitability by cutting costs and steering
customers toward more expensive brands. The firm has acquired regional brewers in China, eliminated
regional beer offerings, and then guided customers toward Budweiser, which is three times more expensive
than Chinese beers, and to its own higher priced Chinese beer, Harbin. The strategy has been so effective
that Budweiser is now consumed more outside than inside the U.S. The firm is expected to repeat this
strategy with its acquisition of SABMiller as the primary means of recovering its purchase price premium
and earning the cost of capital.
The restricted shares are subject to a 5 year lockup, meaning they will not be listed on any public
exchange for 5 years and that they cannot be traded during that period. At the time the merger agreement
was signed, the value of the cash and stock combination was priced 5% lower than the all-cash option. The
purpose of pricing the option to receive shares and cash at a discount to the all-cash offer was to make that
proposal unattractive to all but the largest shareholders: Altria and BevCo.