Question

1. Discuss how an MNC finances its operations using capital structure while minimizing its cost of capital.

2. Discuss examples of successful and unsuccessful international mergers and acquisitions. What factors made each case successful or unsuccessful? Was there expected synergy? Did synergy materialize?

Answer 1

1)

MNC has Countries vice presence in the market. MNC companies form a holding company in one country and Provides finance activities to subisidiary companies located in other countries.

They obtain the finance in the country in which interest rates are lower and Purchases the products in the countries in which prices are lower and pass on to the required subsidaries of MNC.

MNCs are normally able to obtain funds through the international capital markets. Since the cost of funds can vary among markets, the MNC’s access to the international capital markets may allow it to obtain funds at a lower cost than that paid by domestic firms. In addition subsidiaries may be able to obtain funds locally at a lower cost than that available to the parent if the prevailing interest rates in the host country are relatively low.

Cost of capital is computed using Capital Asset Pricing Model Ke = Rf + Beta* Risk Premium

If Company Reduces its Beta for example by doing sales to foreign countries then it can minimises the Overall cost of capital

2)Companies gain synergy benefits from Mergers and acquisitions if there is Proper Plan,Execution,Communication and Correct Due deiligence and there is a popular saying that due to Synergy benefit 1+1 will be more than 2

Success Factors for Mergers and Acquisition(M&A)

1. Setting rationale:

6 key rationales are active investing, growing scale, building adjacencies, broadening scope, redefining business, and redefining industry.

2. Letting the why inform the how the right strategic rationale will inform the preparation and valuation of the merger, what leadership and communication style to adopt, and how to plan for post-merger integration

3. Fusing at full speed: set clear milestones, require active management to achieve these milestones, act fast. A sense of urgency is essential during the early stage.

4. Keeping customers in the forefront: teams from both sides of the transaction must work together to develop a new marketing plan for the combined company.

5. Communicating the vision: executives need to communicate forcefully the new company’s vision, and motivate people to channel their energies in the direction desired.

For Example:The merger between JP Morgan Chase and Bank One

JP Morgan Chase with the opportunity to expand its perspective through providing the firm with access to retail banking markets and clientele in the regions where its previous exposure had been virtually inexistent. The merger gave the firm that extra growth and competitive edge that it was looking for to compete with Citigroup and other rivals .Due to increasing advances in technology and banking processes, which make transactions, among other aspects of business, more effective and efficient.