Question

Merger and Acquision ch 17

Are there any forces driving cross borders mergers that operate more strongly than the reasons for transactions that take place within a given country’s border?

How would you explain why foreign bidders pay higher premiums for targets than the US domestic bidders pay for U.S targets?

Answer 1

THE FORCES AFFECTING CROSS BORDER MERGERS :

COMPANIES TAKING OVER COMPANIES LOCATED IN OTHER COUNTRIES IS CALLED CROSS BORDER MERGERS. THEY GENERALLY TAKE OVER COMPANIES LOCATED VERY CLOSE TO THERE VERY OWN COUNTRY SO THAT THERE IS NOT MUCH DIFFERENCE IN THE VALUES, DEMOGRAPHICS AND CULTURE AND MORE SYNERGIES BETWEEN THE TWO COMPANIES SUE TO THE MERGER. AS CULTURAL AND DEMOGRAPHIC DIFFERENCES CAN INCREASE THE COST OF THE MERGER.  

CURRENCY EXCHANGE RATES ARE AN IMPORTANT FACTOR AFFECTING MERGERS , BECAUSE IF A RICH COUNTRY ACQUIRES A POOR COUNTRY ,THE PRICE PAID WILL BE LESS, BECAUSE OF THE DEPRECIATION OF THE COUNTRY'S CURRENCY AND LOWER ACCOUNTING STANDARDS.

IN CROSS BORDER MERGERS THE ACQUIRERS FORM THE FOREIGN COUNTRY ALSO TAKE ADVANTAGE OF THE DIFFERENCES IN THE VALUATION . THE FOREIGN COUNTRIES TAKE ADVANTAGE OF THE STOCK MARKET FLUCTUATIONS AND THE UNHEDGED EXCHANGE RATES AS A RESULT OF WHICH THEY CAN BID FOR A HIGHER PRICE IN COMPARISON TO THE DOMESTIC BIDDERS. HIGH VALUED ACQUIRERS TAKE OVER THE RELATIVELY INEXPENSIVE TARGETS.

THE OUTDATED TAX STRUCTURE IN THE USA, USA IS THE ONLY DEVELOPED COUNTRY WITH A HIGH CORPORATE INCOME TAX AND WORLDWIDE INCOME TAX, THIS DISADVANTAGE IN THE USA HAS MADE THE US COMPANIES A TARGET FOR ACQUISITIONS FOR THE FOREIGN COMPANIES.

THE US TAX STRUCTURE IMPOSES A 30% TAX RATE ON WORLDWIDE INCOME. OTHER DEVELOPED COUNTRIES IMPOSE LITTLE NO TAX ON INCOME FROM A FOREIGN SUBSIDIARY.

MERGERS ABD ACQUISITION ARE VERY HELPFUL FOR A COMPANY AS THEY ALLOW COMPANIES A DIVEST IN A NEW LINE OF BUSINESS, GET ACCESS TO BETTER TECHNOLOGY, INNOVATION , GAIN ACCESS TO NEW MARKETS.

BUT US HAS NOT BEEN VERY COMPETITIVE IN THE FOREIGN MARKET BECAUSE OF ITS TAX RATE, HAS ITS TAX RATE BE 25% IT WOULD HAVE GAINED BUSINESS IN THE FORM OF AN ACQUIRER IN THE FOREIGN MARKETS RATHER THAN BECOMING A TARGET. BECAUSE OF THE TAX ADVANTAGE OTHER COUNTRIES ENJOY IN THE FOREIGN MARKET , THE US COMPANIES ARE GETTING A BETTER PRICE FROM THE FOREIGN BIDDERS RATHER THAN FROM THEIR OWN COUNTRY AS A RESULT OF WHICH US HAS LOST A LARGE NUMBER OF ITS COMPANIES TO FOREIGN ACQUIRERS.

DUE TO THE LACK OF CAPITAL FLOW IN THE COUNTRY THE EMPLOYMENTS RATES,WAGES, OVERALL DEVELOPMENT OF THE ECONOMY WILL BE WIDELY AFFECTED.