Exam 18: Cross-Border Mergers and Acquisitions:

Which of the following represent common law countries?

What alternatives to acquisition could Actavis have pursued? Speculate as to why a takeover was the preferred option?

Interest rates and expected inflation in one country compared to another country seldom affect exchange rates between the two countries.

Licensing allows a firm to purchase the right to manufacture and sell another firm's products within a specific country or set of countries.

There is no limitation on non-U.S. persons or entities acting as shareholders in U.S. corporations, except for certain regulated industries.

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.

Which of the following is true about segmented capital markets?

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.

Nestlé Buys Majority Ownership Stake in Chinese Candy Maker Acquisition often is a more desirable option to a startup in a foreign country. Cross-border acquisitions require substantial patience. The size of the Chinese consumer market makes growth potential highly attractive. ______________________________________________________________________________ After being in negotiations for two years, Swiss giant Nestlé, the world’s largest food company, announced on July 15, 2011, that it had reached an agreement to pay $1.7 billion for a 60% interest in candy maker Hsu Fu Chi International. The remainder of the firm would be owned by the founding Hsu family. This transaction constituted the biggest deal yet for Nestlé in China and one of the biggest in China by a foreign firm. The deal represents Nestlé’s second major purchase in China in 2011, after the firm agreed to buy 60% of the Yinlu Foods Group in April. The agreement called for Nestlé initially to buy 43.5% of the firm’s shares from independent shareholders (i.e., non–founding family and noninstitutional investors) for 4.35 Singapore dollars (equivalent to $3.56 per share), a 24.7 % premium over the six months ending on July 1, 2011, and a 16.5% stake from the Hsu family. Hsu Fu Chi’s current CEO and chairman, Mr. Hsu Chen, would continue to manage the firm. Nestlé paid 3.3 times revenue, as compared to 2.4 times what U.S. food manufacturer Kraft Foods paid for British candy company Cadbury in 2010. However, the deal was less expensive than Mars’ takeover of Wrigley at 4.2 times sales in 2008 and DANONE’s purchase of Dutch rival Numico for 4.5 times sales in 2007. Nestlé justified the multiple of revenue it paid by noting that the investment in Hsu Fu Chi provides an opportunity to become the top player in this high-growth market. In addition, Hsu Fu Chi provides a platform for future acquisitions that could in concept be relatively easily added to its Chinese confectionary operations. Despite having had a presence in China for more than 20 years, Nestlé has found it difficult to grow its distribution system organically (i.e., by reinvesting in its existing operations). As of 2010, Nestlé operated 23 plants and two research centers with more than 14,000 employees in the country, with annual sales of $3.3 billion. Nestlé’s existing product portfolio in China at that time included culinary products, instant coffee, bottled water, milk powder, and other products for the food service industry. With the addition of Hsu Fu Chi, Nestlé’s sales in China jumped to $4.2 billion. Nevertheless, its market share in the food business still lagged that of rivals Unilever and DANONE. With its revenues in China growing at 8% to 10% annually, Nestlé has stated publicly that it intends to derive at least 45% of its total annual revenue from emerging countries by the end of the decade, as compared to about one-third in 2010. Founded in 1992, Hsu Fu Chi has four factories and 16,000 employees in China and is the leading manufacturer and distributor of confectionery products in China. With an estimated 6.6% market share and annual sales of $800 million, the firm makes chocolate, candies, and pastries popular in China and had annual sales of $800 million at the time of the transaction. Profits rose 31% in 2010 to $93 million. Located in the southern Chinese city of Dongguan, the firm operates an extensive distribution network and has numerous retail outlets, which should facilitate the distribution and sale of Nestlé products in China. Hsu Fu’s annual revenue is growing three times faster than Nestlé’s global annual sales. The firm’s direct distribution network forms a large barrier to entry for competitors. With Hsu Fu Chi listed on the Singapore stock exchange, the deal helped unlock value for Hsu Fu Chi’s independent shareholders. As with many Singapore-listed Chinese firms, Hsu Fu Chi’s independent shareholders had seen little appreciation of their holdings in recent years and had found it difficult to sell their shares, given the limited daily trading volume in the market for the firm’s shares. Daily trading volume in the shares averaged about 0.1% of the firm’s market cap. Despite having similar profit margins, Hsu Fu Chi traded at a ratio of 22 times trailing earnings, compared with 28 for comparable firms. With the founding family owing 57% of the shares and Baring Private Equity Asia owning 15%, there were few independent shareholders to whom to sell shares. As the controlling shareholder, the founding family had little incentive to buy out the minority shareholders except at a significant discount from what investors believe is the firm’s true value in order to take the firm private by buying out the public shareholders. Consequently, the independent shareholders had ample reason to support the Nestlé proposal. Hsu Fu Chi, which currently generates all of its revenue in China, may need Nestlé to expand overseas. The firm has stated that it wants to enter the international market, but it may not have the requisite resources to do so. Nestlé’s strong international network and name recognition may make such expansion possible. -Despite having similar profit margins, Hsu Fu Chi traded at a ratio of 22 times trailing earnings compared with 28 for comparable firms. Why do you believe Hsu Fu Chi's share price on the Singapore stock market sold at a 21% discount from the share price of other firms?

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?

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. ^{Schultes, 2010} -Why would rising commodity prices spark industry consolidation?

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.

Acquiring businesses outside the U.S. involves additional obstacles atypical of domestic acquisitions.

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. ^{Schultes, 2010} -Why would the annual cost savings not be realized until the end of the third year?

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.

Employees receive far greater legal protection in many developed foreign countries than they do in the U.S.

The American Depository Receipt (ADR) market evolved as a means of enabling foreign firms to raise funds in the U.S. equity markets.

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.= -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.

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.

Nestlé Buys Majority Ownership Stake in Chinese Candy Maker Acquisition often is a more desirable option to a startup in a foreign country. Cross-border acquisitions require substantial patience. The size of the Chinese consumer market makes growth potential highly attractive. ______________________________________________________________________________ After being in negotiations for two years, Swiss giant Nestlé, the world’s largest food company, announced on July 15, 2011, that it had reached an agreement to pay $1.7 billion for a 60% interest in candy maker Hsu Fu Chi International. The remainder of the firm would be owned by the founding Hsu family. This transaction constituted the biggest deal yet for Nestlé in China and one of the biggest in China by a foreign firm. The deal represents Nestlé’s second major purchase in China in 2011, after the firm agreed to buy 60% of the Yinlu Foods Group in April. The agreement called for Nestlé initially to buy 43.5% of the firm’s shares from independent shareholders (i.e., non–founding family and noninstitutional investors) for 4.35 Singapore dollars (equivalent to $3.56 per share), a 24.7 % premium over the six months ending on July 1, 2011, and a 16.5% stake from the Hsu family. Hsu Fu Chi’s current CEO and chairman, Mr. Hsu Chen, would continue to manage the firm. Nestlé paid 3.3 times revenue, as compared to 2.4 times what U.S. food manufacturer Kraft Foods paid for British candy company Cadbury in 2010. However, the deal was less expensive than Mars’ takeover of Wrigley at 4.2 times sales in 2008 and DANONE’s purchase of Dutch rival Numico for 4.5 times sales in 2007. Nestlé justified the multiple of revenue it paid by noting that the investment in Hsu Fu Chi provides an opportunity to become the top player in this high-growth market. In addition, Hsu Fu Chi provides a platform for future acquisitions that could in concept be relatively easily added to its Chinese confectionary operations. Despite having had a presence in China for more than 20 years, Nestlé has found it difficult to grow its distribution system organically (i.e., by reinvesting in its existing operations). As of 2010, Nestlé operated 23 plants and two research centers with more than 14,000 employees in the country, with annual sales of $3.3 billion. Nestlé’s existing product portfolio in China at that time included culinary products, instant coffee, bottled water, milk powder, and other products for the food service industry. With the addition of Hsu Fu Chi, Nestlé’s sales in China jumped to $4.2 billion. Nevertheless, its market share in the food business still lagged that of rivals Unilever and DANONE. With its revenues in China growing at 8% to 10% annually, Nestlé has stated publicly that it intends to derive at least 45% of its total annual revenue from emerging countries by the end of the decade, as compared to about one-third in 2010. Founded in 1992, Hsu Fu Chi has four factories and 16,000 employees in China and is the leading manufacturer and distributor of confectionery products in China. With an estimated 6.6% market share and annual sales of $800 million, the firm makes chocolate, candies, and pastries popular in China and had annual sales of $800 million at the time of the transaction. Profits rose 31% in 2010 to $93 million. Located in the southern Chinese city of Dongguan, the firm operates an extensive distribution network and has numerous retail outlets, which should facilitate the distribution and sale of Nestlé products in China. Hsu Fu’s annual revenue is growing three times faster than Nestlé’s global annual sales. The firm’s direct distribution network forms a large barrier to entry for competitors. With Hsu Fu Chi listed on the Singapore stock exchange, the deal helped unlock value for Hsu Fu Chi’s independent shareholders. As with many Singapore-listed Chinese firms, Hsu Fu Chi’s independent shareholders had seen little appreciation of their holdings in recent years and had found it difficult to sell their shares, given the limited daily trading volume in the market for the firm’s shares. Daily trading volume in the shares averaged about 0.1% of the firm’s market cap. Despite having similar profit margins, Hsu Fu Chi traded at a ratio of 22 times trailing earnings, compared with 28 for comparable firms. With the founding family owing 57% of the shares and Baring Private Equity Asia owning 15%, there were few independent shareholders to whom to sell shares. As the controlling shareholder, the founding family had little incentive to buy out the minority shareholders except at a significant discount from what investors believe is the firm’s true value in order to take the firm private by buying out the public shareholders. Consequently, the independent shareholders had ample reason to support the Nestlé proposal. Hsu Fu Chi, which currently generates all of its revenue in China, may need Nestlé to expand overseas. The firm has stated that it wants to enter the international market, but it may not have the requisite resources to do so. Nestlé’s strong international network and name recognition may make such expansion possible. -Do you believe that multiples of revenue paid by other food companies is a good means of determining the true value of Hsu Fu Chi? Why? Why not?