O 173 Cross Border Mergers and Acquisitions

These days, companies look for and need to explore growth opportunities on a global basis. In principle, the growth of the foreign presence in any national economy could take place in either of two ways. Companies could grow primarily through the construction of new production facilities in a foreign country, financed either through the establishment of new subsidiaries or through investment by their existing facilities in the foreign country. Alternatively, companies could grow through the acquisition of existing foreign firms.

Obviously, both kinds of growth have recently taken place in the USA and other countries. For example, ventures such as the establishment of Japanese automobile plants in the USA have occurred simultaneously with events such as Daimler's acquisition of Chrysler. In quantitative terms, however, acquisitions (external growth) are much larger than the construction of new production facilities abroad (internal growth). Although internal growth is usually natural and economical, the process of growth may be very slow. In recent years, a company's growth through a merger with the existing business activities of a foreign firm has received substantial attention as an alternative to internal growth.

In chapter 18, we consider the purchase of an individual asset as a capital budgeting decision. When a company is buying another company, it is making an investment. Thus, the basic principles of capital investment decisions apply. But mergers are often more difficult to evaluate. First, the financial manager must be careful to define benefits. Second, the financial manager needs to understand why mergers occur and who gains or loses as a result of them. Third, the acquisition of a company is more complicated than the purchase of a new machine, because special tax, legal, and accounting issues must often be addressed. Finally, the integration of an entire company is much more complex than the installation of a single new machine.

17.3.1 Terminology

A merger is a transaction that combines two companies into one new company. An acquisition is the purchase of one firm by another firm. Although we have drawn the formal distinction between a merger and an acquisition, the two terms are often used interchangeably. The parties in a merger can be classified as an acquiring company and an acquired company. The acquiring company, also known as a bidder, initiates the offer, while the acquired company, often called a target company, receives the offer.

Acquisitions are also categorized as being either friendly or hostile. A friendly takeover is an offer made directly to the firm's management or its board of directors. In a hostile takeover, the acquiring company often bypasses the target company's management and approaches its shareholders directly with a tender offer for the purchase of their assets. A tender offer is an offer to buy a certain number of shares at a specific price and on a specific date for cash, stock, or a com bination of both. A tender offer is usually associated with a hostile takeover, but it is also used in friendly takeovers when the target company's management approves the offer before it is presented to shareholders.

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