Exam 18: Cross-Border Mergers and Acquisitions: Analysis and Valuation

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 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.

The decision to buy political risk insurance depends on the size of the investment and the perceived level of political and economic risk.

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?

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?

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

Which of the following is true about segmented capital markets?

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.

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.

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.

Product liability claims are generally more frequent and judgments are larger outside the U.S.

The most common form of payment involving non-U.S.firms engaged in M&As is

Which of the following represent common law countries?

Mergers are legal in all countries.

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

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. -Describe some of the ways in which CNOOC could protect its rights as a minority investor in the joint venture project with Chesapeake? Be specific.

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. -What real options (see Chapter 8)might be implicit in CNNOC's investment in Chesapeake? Be specific.

Political Risk in Cross-Border Transactions-CNOOC's Aborted Attempt to Acquire Unocal In what may be the most politicized takeover battle in U.S. history, Unocal announced on August 11, 2005, that its shareholders approved overwhelmingly the proposed buyout by Chevron. The combined companies would produce the equivalent of 2.8 million barrels of oil per day and the acquisition would increase Chevron's reserves by about 15 percent. With both companies owning assets in similar regions, it was easier to cut duplicate costs. The deal also made Chevron the top international oil company in the fast growing Southeast Asia market. Unocal is much smaller than Chevron. As a pure exploration and production company, Unocal had operations in nine countries. Chevron operated gas stations, drilling rigs, and refineries in 180 countries. Sensing an opportunity, Chevron moved ahead with merger talks and made an all-stock $16 billion offer for Unocal in late February 2005. Unocal rebuffed the offer as inadequate and sought bids from China's CNOOC and Italy's ENI SPA. While CNOOC offered $17 billion in cash, ENI was willing to offer only $16 billion. Chevron subsequently raised its all-stock offer to $16.5 billion, in line with the board's maximum authorization. Hours before final bids were due, CNOOC informed Unocal it was not going to make any further bids. Believing that the bidding process was over, Unocal and Chevron signed a merger agreement on April 4, 2005. The merger agreement was endorsed by Unocal's board and cleared all regulatory hurdles. Despite its earlier reluctance, CNOOC boosted its original bid to $18.5 billion in late June to counter the Chevron offer. About three fourths of CNOOC's all-cash offer was financed through below-market-rate loans provided by its primary shareholder, the Chinese government. On July 22, 2005, Chevron upped its offer to $17.7 billion, of which about 60 percent was in stock and 40 percent in cash. By the time Unocal shareholders actually approved the deal, the appreciation in Chevron's stock boosted the value of the deal to more than $18.1 billion. CNOOC's all-cash offer of $67 per share in June sparked instant opposition from members of Congress, who demanded a lengthy review by President George W. Bush and introduced legislation to place even more hurdles in CNOOC's way. Hoping to allay fears, CNOOC offered to sell Unocal's U.S. assets and promised to retain all of Unocal's workers, something Chevron was not prone to do. CNOOC also argued that its bid was purely commercial and not connected in any way with the Chinese government. U.S. lawmakers expressed concern that Unocal's oil drilling might have military applications and CNOOC's ownership structure (i.e., 70 percent owned by the Chinese government) would enable the firm to secure low-cost financing that was unavailable to Chevron. The final blow to CNOOC's bid was an amendment to an energy bill passed in July requiring the Departments of Energy, Defense, and Homeland Security to spend four months studying the proposed takeover before granting federal approval. Perhaps somewhat naively, the Chinese government viewed the low-cost loans as a way to "recycle" a portion of the huge accumulation of dollars it was experiencing. While the Chinese remained largely silent through the political maelstrom, CNOOC's management appeared to be greatly surprised and embarrassed by the public criticism in the United States about the proposed takeover of a major U.S. company. Up to that point, the only other major U.S. firm acquired by a Chinese firm was the 2004 acquisition of IBM's personal computer business by Lenovo, the largest PC manufacturer in China. While the short-term effects of the controversy appear benign, the long-term implications are less clear. It remains to be seen how well international business and politics can coexist between the world's major economic and military superpower and China, an emerging economic and military superpower in its own right. Cross-border transactions often require considerable political risk. In emerging countries, this is viewed as the potential for expropriation of property or disruption of commerce due to a breakdown in civil order. However, as CNOOC's aborted effort to takeover Unocal illustrates, foreign firms have to be highly sensitive to political and cultural issues in any host country, developed or otherwise. : -Should CNNOC have been permitted to buy Unocal? Why? Why not?

Target shareholders most often receive shares rather than cash in cross-border transactions.

Which of the following is generally not a motive for firms to expand internationally?