Exam 18: Cross-Border Mergers and Acquisitions:

Which of the following represent common political and economic risks in entering an emerging market?

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.

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.

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. -Speculate as to why Nestle used cash rather than its stock to acquire its ownership interest in Hsu Fu Chi?

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.

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.= -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?

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. -With the world's largest and fastest-growing domestic car market, why do you believe Chinese carmakers are interested in expanding internationally?

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.

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.

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. -How might the Chinese have been able to persuade U.S. regulatory authorities to approve the transaction?

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.

Discuss adjustments commonly made in estimating the cost of debt in emerging countries.

Globally integrated capital markets provide foreigners with unfettered access to local capital markets and local residents to foreign capital markets.

Local country firms may be interested in alliances for which of the following reasons?

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).

A Tale of Two International Strategies: The Wal-Mart and Carrefour Saga Integrating foreign target companies and introducing improved operating and governance can be a daunting task. What works in the acquirer's country may not be transferable to the target's local market. ______________________________________________________________________________________ Wal-Mart began expanding aggressively outside the United States in the 1990s. Its principal international rival at that time was French retail chain Carrefour. After opening the world's first superstore in 1963, Carrefour spent the next four decades expanding its grocery and general merchandise stores across Europe, South America, and Asia. While the chain grew rapidly through the 1990s, Carrefour has experienced difficult times in recent years. Carrefour shares have plunged more than two-thirds since 2007. Though having about the same number of retail locations (9,667 for Wal-Mart compared to 9,631 for Carrefour), Carrefour fell far behind Wal-Mart's $467 billion in fiscal 2011 revenue. Wal-Mart's international sales of $109 billion in 28 countries outside the U.S. almost exceed Carrefour's total $114 billion in annual revenue, including sales in France. Wal-Mart's operating margins of 7.5% are 2 percentage points higher than comparably defined Carrefour margins. Net income per employee for Wal-Mart was $7,804 per employee, versus Carrefour's $1,260. To understand how Carrefour floundered, we need to look at the global strategies of the two firms. Intended to offset sluggish growth in France, Carrefour expanded too rapidly internationally as it entered 24 countries during the 10 years ending in 2004. While it succeeded in China, with annual revenue totaling $5.8 billion, it fell short in a number of other countries. Since 2000, Carrefour has sold off operations in 10 countries, including Mexico, Russia, Japan, and South Korea. The firm also has announced that it will withdraw from other countries. Wal-Mart has shown considerable success in growing its international operations. Having expanded at a more disciplined pace than Carrefour, Wal-Mart enjoyed greater success in expanding in Mexico, South America, and Asia. Unlike Carrefour, Wal-Mart was able to finance its international growth from cash generated from its domestic U.S. operations. For Carrefour, revenue from its French-based stores, which account for 43% of its annual revenue, was largely stagnant. Moreover, sales also were slumping throughout the rest of Europe, which contributes about one-third of Carrefour's sales. This success has not come without considerable challenges. The year 2006 marked the most significant retrenchment for Wal-Mart since it undertook its international expansion in the early 1990s. In May 2006, Wal-Mart announced that it would sell its 16 stores in South Korea. In July 2006, the behemoth announced that it was selling its operations in Germany to German retailer Metro AG. Wal-Mart, which had been trying to make its German stores profitable for eight years, announced a pretax $1 billion loss on the sale. The firm apparently underestimated the ferocity of German competitors, the frugality of German shoppers, and the extent to which regulations, cultural differences, and labor unions would impede its ability to apply in Germany what had worked so well in the United States. Wal-Mart has not been alone in finding the German discount market challenging. Nestlé SA and Unilever are among the large multinational retailers that had to change the way they do business in Germany. France's Carrefour SA, Wal-Mart's largest competitor worldwide, diligently avoided Germany. After opening its first store in mainland China in 1996, Wal-Mart faced the daunting challenge of the country's bureaucracy and a distribution system largely closed to foreign firms. In late 2011, Chinese officials required the firm to close 13 stores due to allegations of mislabeling pork as organic. Wal-Mart also has had difficulty in converting firms used to their own way of doing things to the "Wal-Mart way." Specifically, it has taken the firm more almost four years to integrate the 100-plus stores of Trust-Mart, a Chinese chain it acquired in 2007. Overall, Wal-Mart realized its first profit in 2008, a dozen years after it first entered the country. In India, Wal-Mart is still waiting for the government to ease restrictions on foreign firms wanting to enter the retail sector, which is currently populated with numerous small merchants. Efforts to implement reforms allowing foreign retailers to own a majority holding in local supermarket chains were halted due to a firestorm of public protest. At the end of 2011, Wal-Mart has no retail presence in the country. Nor does Wal-Mart have a retail presence in Russia, where, unlike in India, foreign retailers are welcome but corruption is rife. The combination of corruption, bureaucracy, and administrative processes has discouraged Wal-Mart from making acquisitions in Russia, even though there have been opportunities to do so. Despite these missteps, Wal-Mart would appear to be well on its way to diversifying its business from the more mature U.S. market to faster-growing emerging markets. With the announcement in late 2010 of its controlling interest in South African retailer Massmart Holdings, more than one-half of all Wal-Mart stores are now located outside of the United States. Massmart gives Wal-Mart entry into sub-Saharan Africa, a region that has been largely ignored by the firm's primary international competitors, France's Carrefour SA, Germany's Metro AG, and the United Kingdom's Tesco PLC. South Africa has embraced shopping malls for years, and an increasingly affluent middle class has emerged since the demise of apartheid. South Africa also has little regulatory oversight. Furthermore, there is an established infrastructure of roads, ports, and warehouses as well as effective banking and telecommunications systems. While the country has a relatively small population of 50 million, it provides access to the entire region. However, the country is not without challenges, including well-organized and sometimes violent labor unions, a high crime rate, and a 25% unemployment rate. Wal-Mart's past mistakes have taught it to make adequate allowances for significant cultural differences. With respect to Massmart Holdings, there appears to be no immediate plans to rebrand the chain. The first changes customers will see will be the introduction of new products, including private-label goods and the sale of more food in the stores. Wal-Mart also has publicly committed to honoring current union agreements and to work constructively with the unions in the future. Current Massmart management also will remain in place. Its decision to buy less than 100% of Massmart's outstanding shares reflected a desire by institutional investors in Massmart to retain exposure to the region and by the South African government to continue to have Massmart listed on the South African stock exchange. As one of the nation's largest companies, it provides significant name recognition for investors and a sense of national pride. Wal-Mart has a history of structuring its international operations to meet the demands of each region. For example, Wal-Mart owns 100% of its Asda operations in the United Kingdom and 68% of Wal-Mart de Mexico. SABMiller Acquires Australia's Foster's Beer _____________________________________________________________________________________ Key Points Properly executed cross-border acquisitions can transform regional businesses into global competitors. Management must be nimble to exploit opportunistic acquisitions. _____________________________________________________________________________________ With the end of apartheid in South Africa in 1994, South African Breweries (SAB) moved from a sprawling conglomerate consisting of beer, soda bottling, furniture, apparel, and other businesses to a focus on beverages only. Seeking to expand beyond South Africa's borders, SAB executives studied the global practices of multinational corporations like Unilever and IBM to adopt what they believed were best practices before undertaking strategic acquisitions in Africa and elsewhere. The firm's overarching objective was to create a global brand. After a series of cross-border transactions, SAB's international operations accounted for more than 40% of its annual sales by 2001. In a transformational transaction, SAB bought Miller Brewery from Philip Morris for $5.6 billion in 2002 and renamed the combined companies SABMiller. Since then it has filled out its global portfolio, adding breweries in Latin America, Asia, and Africa. During the last decade, the global beer industry experienced increasing consolidation. Following InBev's acquisition of Anheuser-Busch for $56 billion in 2008 and Heineken's purchase of Mexico's FEMSA Cerveza in 2010, the top four breweries (i.e., Anheuser-Busch InBev, SABMiller, Heineken, and Carlsberg) controlled more than 50 % of the global beer market, up from 20% in the late 1990s. In 2011, SABMiller's annual revenue exceeded $31 billion, just behind the industry leader, Anheuser-Busch InBev. About 70% of SABMiller's revenue is in emerging markets. With the number of sizeable independent and profitable breweries declining rapidly, SAB moved to acquire the Foster Group, Australia's largest brewer, with more than 50% of the domestic beer market. SABMiller believed the timing was right because both Anheuser-Busch InBev and Heineken were saddled with too much debt from their recent acquisitions to submit serious bids. The firm's initial bid on June 21, 2011, valued the target at $9.5 billion in Australian dollars ($9.7 billion in U.S. dollars), or $4.90 Australian dollars per share ($5 U.S.); however, Foster dismissed the offer as too low. On August 17, 2011, SABMiller adopted a hostile strategy when it went directly to Foster's shareholders with a tender offer. To win the backing of its shareholders, Foster's said in late August that it would pay out at least $525 million in Australian dollars ($536 U.S.) to shareholders through a share buyback or dividend. To counter this move, SABMiller said that it would reduce its purchase price by the amount of any dividend paid to shareholders or share buyback undertaken by Foster's. The acrimonious takeover battle came to an end on September 1, 2012, as SABMiller offered to raise its cash bid by 20 cents to $5.10 in Australian dollars ($5.20 U.S.). As part of the deal, Foster's made a one-time payment of $.43 per share ($.44 U.S.) to its shareholders. The total value, including the value of assumed debt, was $11.5 billion in Australian dollars ($11.7 U.S.). SABMiller now holds about 12% of the global beer market, second to Anheuser-Busch InBev's 25%. Foster's has one of the highest profit margins of any large brewery worldwide, reflecting its greater-than-50% market share in Australia. While synergies would appear to be limited, SABMiller's reputation for aggressive cost cutting could result in profit improvements. SABMiller also received tax loss carryforwards totaling $817 million Australian ($833 million U.S.) resulting from the spin-off by the Foster Group of its wine operations in 2010. The acquisition is expected to be accretive after the first full year of operation. 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. -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?

M&As represent by far the most profitable means of entering foreign markets.

Using the common motives for cross-border deals discussed in this chapter, speculate as to the reasons Actavis acquired Forest Labs.

While a foreign buyer may acquire shares or assets directly, share acquisitions are generally the simplest form of acquisition.

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.= -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.