Question

Consider the following point and counter-point arguments then use the Internet to learn more about the issue. Which argument to you support? Explain why and offer your own opinion on the issue. Point: A foreign target can be assessed like any other asset. The value of a foreign target to an MNC is the present value of the future cash flows to the MNC. The process of estimating a foreign target’s value is the same as the process of estimating a machine’s value. A target has expected cash flows, which can be derived from information about previous cash flows. Counter-Point: A foreign target cannot be assessed like any other asset. A target’s behavior will change after it is acquired by an MNC. Its efficiency may change depending on the ability of the MNC to integrate the target with its own operations. The morale of the target employees could either improve or worsen after the acquisition, depending on the treatment by the acquirer. Thus, a proper estimate of cash flows generated by the target must consider the changes in the target due to the acquisition.

Answer 1

The answer fot this question lies if there is any Synegy between the two companies.

If there is no synergy then no matter how much we estimate using the future cash flows and all it will fail.

Coming to the question Can a foreign target be assessed like any other asset... so inorder to know the value of the acquisitions yes we have to follow the method of projecting future cash flows and discounting back to calculate net present value.But here we have to be careful as the initial outlay will be high and the expected cash flows should be accurate.

Now we have to consider other factors.A targets behavior may change after the acquisition. Target may not generate the same cash flows that it produced in past years.Management may not function properly because of culture change in the operations.

Political and economic conditions may change.For suppose in India where it is politically unstable,some people may raise concerns about foreign companies acquiring local companies andthe workers union may raise a strike and it will have a serious impact on earnings.

It also depends on stock market conditions and most importantly local Tax conditions. One good example is how vodafone is fighting with indian government for retrospective tax issue.

So the learnings from the above is that to know the potential value for the target company in monetary terms we have to treat it like some other asset and follow the valuation methods to estimate the Value for the company.

But to know whether this target company will work or not we have to consider all the other factors that are mentioned above.

So both points are important. Remember synergy is important.