Anda di halaman 1dari 18
Managerial Finance Emerald Article: International Mergers and Acquisitions: A Review of Some Current Issues Peter
Managerial Finance Emerald Article: International Mergers and Acquisitions: A Review of Some Current Issues Peter

Managerial Finance

Emerald Article: International Mergers and Acquisitions: A Review of Some Current Issues Peter E. Koveos

Article information:

To cite this document: Peter E. Koveos, (1993),"International Mergers and Acquisitions: A Review of Some Current Issues", Managerial Finance, Vol. 23 Iss: 3 pp. 72 - 88

Permanent link to this document:

http://dx.doi.org/10.1108/eb018616

Downloaded on: 30-04-2012

To copy this document: permissions@emeraldinsight.com

This document has been downloaded 1104 times.

Access to this document was granted through an Emerald subscription provided by OXFORD BROOKES UNIVERSITY

For Authors:

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service. Information about how to choose which publication to write for and submission guidelines are available for all. Additional help for authors is available for Emerald subscribers. Please visit www.emeraldinsight.com/authors for more information.

About Emerald

With over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.

*Related content and download information correct at time of download.

www.emeraldinsight.com

Volume 23 Number 3

1997

72

International Mergers and Acquisitions:

A Review of Some Current Issues

Peter E. Koveos, School ofManagement, Syracuse University, Syracuse, NY 13244-

2130

I. Introduction

Corporate history has featured a number of approaches to restructuring, both internal and external to the firm. External restructuring has taken place through a variety of mechanisms, including mergers, acquisitions, consolidations, divestitures, leveraged

buyouts, and spinoffs.

1

Restructuring has been especially prevalent on worldwide

basis since the 1980s. In addition to developments in western industrialized econo- mies, the presence of the phenomenon within the world business system has been augmented by the transition of so many previously planned economies to a new

market-based framework.

In this review, I explore certain aspects of restructuring on international basis and refer to explanations for their nature. Formulation of these explanations becomes an increasingly difficult challenge when the environment undergoes rapid, signifi- cant, and complicated changes. Research on the restructuring experience, then, should be viewed as an evolving task. For purposes of this review, such terms as merger, acquisition, divestiture, and restructuring are used interchangeably.

II. Explanations of restructuring within the domestic framework

Casual analysis ofthe US experience (briefly discussed in Appendix 1) leads to some interesting observations. First, restructuring activity has been influenced by the business cycle. Recessions have usually slowed down external expansion plans. Second, the condition of the restructuring market itself has determined the level and composition of that activity. During the 1980s, for example, the mergers and acqui- sitions market was especially strong. Third, certain types of mergers seem to have been more successful than others. In particular, activities contained within the same line of business have had a greater chance of success than those that extended across business lines. Fourth, whereas confrontational socio-political and regulatory envi- ronments have not brought restructuring activity to a halt, permissive environments have enhanced the rate of such activity (Petty, et al, 1989. Also see Post, 1994, and Gaughan, 1991).

From the point of view of the individual firm, restructuring may be viewed as an integral part of its strategy. Similar to other strategic decisions made by the firm, it may take place in order to add to shareholder wealth. Alternatively, it may take place as management acts to enhance its own stature. Specific factors associated with restructuring have included:

Synergy. Synergy from mergers or other restructuring activity has been charac- teristically portrayed as 2+2=5. Similarly, divestitures have been expressed as 5-2=4. O'Rourke considers this definition deceptive. Instead, he states, synergy is

Volume 23 Number

3 1997

"an acquirer's being able to use its significant strengths to improve the performance ofthe acquired company, or taking one ofthe acquired company's strengths to bolster a weakness of its own. Two strengths or two weaknesses "

combined do not make synergy

(O'Rourke, 1989).

73

Synergy benefits may emanate from operating or financial sources. Economies of scale and scope are typically associated with the first source, while lowering of the cost of capital with the second.

Diversification. Firms may acquire other firms and thus diversify their holdings in order to attain benefits similar to those sought by diversifying portfolio investors. The rise ofconglomerates in the 1950s and 1960s was motivated by the diversification argument.

Improvement in management performance. Bidding firms may add value by managing targeted firms better than the way in which they are currently managed.

Integration. Acquiring firms may seek the benefits generated from horizontal or vertical integration.

Financial market imperfections. Assets mispriced in financial markets may be acquired in the market for real goods.

Tax Reasons. Firms may engage in acquisitions to improve their tax liability position.

Management incentives. Roll developed the hubris hypothesis of corporate restructuring. Accordingly, managers initiate acquisitions primarily in pursuit of individually shaped goals (Roll, 1986 and Gaughan, 1991).

Increase in reported earnings. Some mergers are motivated by the existence of "Price-Earnings Magic," the acquisition, that is, of a low P/E firm by a high P/E firm to show increase in earnings (Conn, 1973). This motivation, for example, was particularly evident in the merger experience of the 1960s.

Some ofthe above reasons are interrelated. The search for horizontal integration, for example, may imply presence of synergy benefits or the opportunity to improve management performance. Diversification may bring about lower risk of bankruptcy, thus lowering the cost of capital, a benefit associated with financial synergy.

III. The cost of restructuring and valuation approaches

The relevance of the factors underlying the restructuring decision is linked to the explicit and implicit costs of the acquisition and the benefits emanating from it. Central to the position from which the bidder and the target operate is the value established for the acquisition. In practice, the final purchase price of a firm is often determined through an iterative negotiation process that includes maximum or mini- mum limits. Expectations regarding benefits and costs of the acquisition are instru- mental during negotiations. These expectations are also important in assigning the exact roles (target or bidder) undertaken by each party (Harris, 1994).

Volume 23 Number 3 1997

74

Target and bidder may not have the same degree of information about each other. This issue may be very complicated in the case of a target that is a privately held entity. The valuation methods used in this case, then, and the process used to realize the takeover may differ substantially from those used in the case of a publicly held company.

When adequate market information is available as input to valuation, widely known security valuation models serve as the foundation of the task. In addition to the market-determined price of the single share, however, bidders may be willing to pay a premium in order to attain effective control of a firm. These premia have varied considerably from year to year depending on market conditions. Premia may also vary according to the specific acquisition tactic, for example, merger versus tender offer. Premia for 1993 were on the average 45.5% over stock prices four weeks before the announcement of the deal and 38.9% one week prior. These levels are somewhat below the respective figures for 1992. 2

When the acquisition takes place through an exchange of stock of the two firms involved, the number of shares ofthe bidder required to obtain one share ofthe target is called the exchange ratio. The method of payment for the acquisition may be a very important determinant of the rationale for the transaction.

When a publicly accessible market is not available to the buyer and the seller, other approaches to valuation of a business may be followed. The establishment of value may rely on the information provided in the financial statements, on capitali- zation of the target's earnings or cash flows, liquidation value, cost of asset replace- ment, and other aspects of the firm. If the firm is small and a large part of the firm's value is attributed to the nature ofthe current ownership, a management discount may be calculated when the firm is transferred. Valuation may also incorporate informa- tion on firms considered similar to the target. The final figure (or range) arrived at may reflect values generated by more than one of the above approaches, making valuation an art as much as a science.

IV. The restructuring process

Restructuring may be the culmination of a long and tedious process that is made necessary by the firm's own efforts to compile more information in order to increase the chances ofmaking the right decision and by requirements posed by outsiders, such as the regulatory authorities. Bibler (1989, pp.3-16) suggests that firms wishing to acquire others follow a process that may include:

* Establishing a clear line of responsibility

* Formulating a comprehensive restructuring plan

* Setting up a set of acquisition criteria

* Identifying all possible candidates for acquisition

* Contacting candidates as appropriate

Volume 23 Number 3 1997

75

* Conducting due-diligence. The due-diligence period "is a time for inten- sive searching for facts, thorough analysis, and constant reevaluation." (Bibler, 1989, p.14).

* Delineating negotiation terms

* Ensuring that the acquired company becomes a fully integrated part of the bidder.

Acquirers should also explore antitrust complications, implications for the as- sumption of seller's liabilities, stock exchange requirements, state corporation laws, tax implications, and other relevant considerations (Scharf, et al., 1991).

The level of preparation by the parties involved does not guarantee that restruc- turing will go through. In 1992, for example, 204 deals were reported as having failed before being concluded, amounting to one failure for every 18 successes (Mergers and Acquisitions, 1993). In 1993, the number of reported failures reached 252, representing one failure for every 16 successes. The actual number of failures every year exceeds the number reported, since the reported total does not account for secret negotiations or for losing bids in contested takeovers.

Prominent among the 1993 failures stands the Bell Atlantic-TCI deal. The $33 billion transaction failed to materialize as a number ofproblems surfaced (regulatory issues, thwarted attempts to renegotiate, corporate culture conflicts). The year also included another giant failure, QVC's bid for Paramount. Of the group of 252, approximately one-third ofthe deals (81) failed as agreements were dropped. Another sizeable number of failures (69) took place as the letter of intent expired. 56 failures struck when negotiations broke off for a number of reasons, including disagreement on price. In other cases, deals failed because the offer was withdrawn (20), the target rejected the bid (11), regulatory problems surfaced (9), the acquirer was outbid (4), and other reasons (Mergers & Acquisitions, 1994c). Many of the above failures occurred during due-diligence, as the influx of additional information led to revisions of initial cost-benefits projections.

V. The Cross-Border Experience

Values for foreign acquisitions in the US and US acquisitions overseas for the 1986-1993 period are shown in Figure 1. Both values reached their period highs in 1989 ($69.6 billion and $27.3 billion respectively), but fell precipitously and con- verged in the ensuing years (Mergers and Acquisitions, 1994d).

The number of international deals involving US companies as bidder or targets was moderate in 1993, about 20% of the total. The value of the average transaction was somewhat smaller than the average value for domestic transactions. Overseas transactions, however, did include some megadeals in industries experiencing world- wide consolidation movements. Examples of such deals were the buyout of Freia Maribou A/S, a Norwegian candy and chocolate firm by Philip Morris for $1.5 billion and the acquisition of the coal, gas, and metals operations of NERCO by UK's RTZ for $1.2 billion. {Mergers and Acquisitions, 1994a). The UK was the country most

Volume 23 Number 3 1997

76

active in US acquisitions in 1993 with 86 deals for a value of $9.9 billion, followed by Canada with 68 deals, Japan with 18, and France and Germany with 17 each (Mergers andAcquisitions, 1994b, p.66).

Figure 1 Liquid Asset Ratio around Targeting Repurchases

The Business Services industry was the most active industry both in US domestic and international deals in 1993, with a total of 23 deals valued at $807.6 million. Chemicals were the value-leading industry in acquisitions by foreign companies, with 16 deals amounting to $4,758.8 million. Foreign acquisitions in this industry ac- counted for more than half of the total value of acquisitions for 1993. Printing and Publishing, Mining, Food, and Electronic and Electrical Equipment were also char- acterized by acquisitions of relatively high total value for 1993.

The character ofinternational restructuring has purportedly undergone an impor- tant change since the 1980s. Thus, strategic considerations are becoming more central to firms. "Large companies expanding overseas are looking for acquisitions which fit strategically with their main business and provide economies of scale which help cope with the strains of operating internationally. They are keen to look at options other

Volume 23 Number 3 1997

77

to be continuing adjustment to the events of the 1980s through divesting and a de-emphasis of the conglomerate as a form of restructuring.

VI. Factors Affecting Restructuring Internationally

As general business activity crosses national border, restructuring activity does as well. The reasons for international activity parallel those noted in reference to domestic activity. Furthermore, the theory and practice of foreign direct investment in conjunction with the market for corporate control provide the foundations upon which to build a framework for explaining international restructuring activity.

Direct investment, domestic as well as foreign, can take place through the establishment of a new facility as through acquisition of an existing operation. The acquisition can be a result of a merger or other such restructuring transaction. According to the theory of foreign direct investment, firms expand to take advantage of market imperfections. Imperfections can appear in the form of market disequili- brium, government imposed distortions, market structure imperfections, or market failure imperfections (Calvet, 1981, p.44). In particular:

* Market disequilibria can generate an environment favorable to foreign direct investment. Disequilibria in the foreign exchange market, capital markets, or the market for real assets can make it more attractive for a firm to locate in a foreign country.

* Government-imposed disequilibria include situations created by tariffs and other trade barriers, tax policies, and regulations on the formation and operation of a foreign-owned business.

* Market-structure imperfections refer to price, entry, or other related dis- tortions observed in either home or host country, or in both countries.

* The existence of market failure serves as an obstacle to the efficient allo- cation ofresources.

Foreign direct investment and restructuring are inherently related to each other. The decline in worldwide merger and acquisition activity in the early 1990s - attributed to slower not so much a matter of the rationale given as they are a matter of the additional challenges that firms face in the international arena and the manner with which firms deal with these challenges.

VII. Selected research efforts on cross-border experiences

Academic research on cross-border merger and acquisition activities has not been an voluminous as that devoted to domestic activities, but has produced interesting results.

Harris and Ravenscraft (1991), for example, find that cross-border takeovers are more frequent than domestic acquisitions in the research and development intensive industries and that in three-fourths of international transactions the buyer and the seller are in related industries. They alsofindthat wealth gains generated by targets

Volume 23 Number 3 1997

78

of US firms do not match wealth gains for targets of foreign bidders. The cross-border effect on wealth gains is found to be significantly related to the weakness of the US dollar. Their findings support the role of imperfections in product and foreign exchange markets in the foreign direct investment decision.

Conn and Connell (1990 and 1993) studied the US-UK merge experience. Using the Cumulative Abnormal Returns approach, they find evidence of a time-sensitive relationship of returns to the parameters of the market model.

Kang (1993) examine mergers and acquisitions of US firms by Japanese firms. He finds significant wealth gains for both parties, indicating the importance of bidder-specific characteristics, such as leverage and ties to financial institutions, and to the role of exchange rate movements.

VIII. Differences between domestic and international activity

An important difference between domestic and international activity is the environ- ment in which international firms operate. Kissin and Herrera (1990), for example, in presenting the results oftheir work on international merger activity, note that about 60% of corporate mergers and acquisitions officers responding to a survey indicated that their plans were motivated by the prospect of realization of the European Union. Within a strategic framework, of course, the relationship between the organization and the environment is fundamental to the formulation and implementation of the plan. The cross-border environment takes on a variety of characteristics, raising a number of concerns for participatingfirmsand making international mergers much more difficult to analyze, undertake, and integrate within the firm.

a. Regulatory concerns

Analysis of mergers and acquisitions necessitates informed assessment of the regu- latory environment. A basic concern pertains to the acceptability of the particular form of restructuring. Countries differ with respect to their attitude and regulation of foreign involvement in their various sectors. Some sectors may be completely closed to outsiders. Some countries may regulate certain forms of takeover activity, such as tender offers. Even foreign buyers in countries such as the United States need to be familiar with the regulatory environment. Foreign acquisitions carrying national security implications, for example, are subject to the Exon-Florio law (Spiegel, et al,

1992).

Differences in rules between two countries may also exist in the legal stages of acquisition regulation. A country, for example, may require that the bidder satisfy conditions stated in the offer within 60 days of posting. Gaining approval from the other country involved, however, may require six or seven months. Other differences may relate to the threshold requirements for full bids, acquisition price requirements, and the minimum periods for bids to remain open (Brown and MacLachlan, 1990,

p.60).

When differences in regulatory systems arise, firms may abandon their bids. Alternatively, they may withdraw bids to shareholders in stringent regulation areas.

Volume 23 Number 3 1997

79

Regulators, on their part, may work on a case by case basis or may not even demand strict adherence to requirements if their constituents are not significantly affected (Brown and MacLachlan, 1992, pp.58-60).

Cross-border regulatory concerns may also be present when the companies involved are domiciled in the same country, as long as one of the firms has a large number of stockholders in other countries. The acquisition of Beazer PLC, for example, by another British company, Hanson PLC, required involvement of both British and American regulatory authorities because one-third of Beazer's shares were held by Americans through ADRs. A further complication arose because of Hanson's issuance of a stock purchase warrant, a security ofparticular interest to US regulators (Austin, 1992).

b. Cultural Concerns

Cultural conflicts may play a large role during any or all stages of the merger from negotiations to the integration ofthe target within theframeworkof the bidding firm. Firms must be aware of diverse management styles, nationalistic tendencies, owner- ship patterns, and other such factors (Leighton, 1993).

The importance of cultural factors in cross-border mergers may vary inversely with the size of the firm and the extent of its prior international experience. Kissin and Herrera (1990) point out that foreign buyers have targeted many middle- or small-sized companies in the US. Management of these companies, however, is not usually experienced in international negotiations. From the acquirer's point of view, the perceived lack of ability ofthe US middle-market management prolongs negotia- tions so that these acquirers have ample opportunity to assess management more

accurately.

c. Currency Concerns

Cross-border restructuring activity, like many other cross- border activities, is subject to currency fluctuations. Currency concerns become especially evident at three critical points of the restructuring experience. First, when the firm starts evaluating the target. Second, currency concerns surface when agreement is reached on terms of the transaction but payment is not due for a certain period of time. Third, traditional translation and economic exposures arise as the target is integrated within the bidder's operations. (Binggeli, 1990, pp.67-68).

d. Due Diligence Concerns

Due diligence is an important part of the merger process, since it provides in-depth information to the acquiring firm and to those supplying the necessaryfinancing.The

information

tion, quality of management, cash position, tax status,financialcontrols, and others. When cross-border transactions are contemplated, due-diligence may be complicated by the following factors:

provided may refer to any aspect of thefirm,including strategic orienta-

* Currency issues, as stated above.

Volume 23 Number 3 1997

80

* Commercial, foreign investment, and foreign exchange policies formu- lated by the host government.

* Acquiring financing in one country in order to complete a transaction in another.

* Assessment of the economic, political, and social, and cultural frame- work of the host country.

* Political risk.

* Tax complications.

* Assessment of the condition of financial statements, including considera- tion of debt/equity norms and accounting procedures (see Kissin and Herrera, 1990, for list of relevant points, p.54).

e. Valuation Concerns

The concerns described above point to the formulation ofa crucial question: How do we value a foreign target? The question embodies such issues as formulation of the appropriate cash flows and the assignment of the appropriate discount rate.

f. Control Concerns

The existence of regulatory, cultural, political, and other types of concerns may have implications for the degree of control that can be exerted on the target.

g. Additional concerns

In addition to the concerns stated above, we can identify a number of economic and noneconomic issues that require attention by firms engaging in acquisition activity. Paramount among them is the management of human resources. Marks and Mirvis

(1993) point out that, whereasfirmsare usually aware of market

cal, and other components of their new business environment, they are much less familiar with rules and customs of treating human resources. Early attention to these issues increases the probability of success of the activity.

IX. Regional and Country Experiences

Let us take a brief look into the merger and acquisition experiences of selected areas and countries. In addition to examining the situation in Europe, the UK, and Japan, a brieftreatment is presented ofone ofthe fastest growing countries in the world, Korea, and of a small number of developing countries.

a. Europe and the UK

Europe's Merger Control Regulation became effective in 1990 following a decade and a half of negotiations. It applies to takeovers, acquisitions, and other approaches

growth, technologi-

Volume 23 Number 3 1997

81

used to gain control over a firm. Mergers are investigated by the Commission if they affect the way business is conducted in the EU and have a "Community dimension," defined as a combined worldwide turnover ofthe twofirmsofmore than ECU5 billion and one ofthe twofirmshas EC-wide turnover ofmore than ECU250 million. Mergers are not investigated if each ofthefirmsgenerates at least two- thirds ofthe combined EC turnover in one member State (Price Waterhouse, 1991, p.79). EU as well as non-EU firms are affected by these conditions, which are due to be revised in late 1993 or 1994.

Mergers belonging to the above category are subject to notification and a three week automatic suspension. The Commission's investigation may commence as late as one month following notification to begin its investigation. If the merger is deemed acceptable, it may proceed (Price Waterhouse, 1991, p.80).

The Merger Control Regulation allows the Commission to consider non-eco- nomic criteria, such as those associated with making the deal compatible with EU policies and contributing to the Union's social cohesion. Industrial relations, corpo- rate values, and other relevant factors may come into the picture. Non-EU firms have been especially concerned about application of these criteria to their attempts to acquire EUfirms(Hogan and Huie, 1992).

The largest European acquisition of the 4th Quarter of 1993 was the Vendome Group's (UK) acquisition of Cartier Monde (France) for $3,446.2 million. The largest UK acquisition during the same period was Rothmans' acquisition of Tobacco businesses of Rothmans for $4,728.9 {Mergers and Acquisitions, 1994b, p.69). The performance ofEuropean mergers has received mixed reviews. For example, mergers benfitted shareholders during the first half of the 1980s, as the market seemed to appreciate firms with aggressive acquisition strategies. Starting in 1986, however, and continuing through the 1987 Crash, investors were seeking tangible evidence of superior post-acquisition performance. The developments surrounding Saatchi & Saatchi's experience following the acquisition of the Ted Bates agency illustrate the point (Mergers andAcquisitions, 1989).

The 1990s began slowly, but megadeals by Philip Morris in Switzerland and Guinness in Spain loomed significant. The strategic relationship between Renault and Volvo was initially hailed as "the most significant realignment in the automotive sector," (Holmes, 1991, p.7) a description similar to that awarded to the defunct Ford-Fiat deal ofthe mid-1980s. The result ofthe Volvo-Renault association was also similar to that associated with Ford-Fiat.

b. Japan

Restructuring activities involving Japanese firms have been of special interest to finance scholars and practitioners. These activities include those between Japanese firms in Japan, those involving foreignfirmstargeting Japanesefirmsin Japan, those pertaining to the takeovers of domesticfirmsby Japanesefirms,and those involving Japanese firms abroad.

Volume 23 Number 3 1997

82

As Chairman of Sumitomo Rubber Industries Ltd., Kyokei Yokose writes that

company is not merchandise. It is

"Personally, I do not like the word acquisition

a

a grouping of people, and to sell and buy people would indeed be very problematic." (Yokose, 1988, p.71) His comments reflect the traditional attitude of many Japanese toward merger and acquisition activities and, therefore, the place that these activities occupy within the spectrum of business transactions in general.

Differences in attitudes toward mergers and acquisitions between Japanese and American firms may lie in their respective objective functions. According to Kanji Ishizumi, many in Japan would say that companies exist to benefit their employees. Firm activities, then, must take the welfare of employees under consideration (Ishizumi, 1990, p.12). As a result, methods viewed as "typically American" hostile acquisitions through tender offers or proxy battles are not generally found in Japan (Ishizumi, 1990, p.147).

This does not imply that mergers and acquisitions do not take place in Japan. According to Kester (1991, p.83), the number of firm sales or mergers has risen from about 500 a year in the 1950s to about 2,000 a year in the 1980s. The relative frequency of these combinations in Japan is not much different from the US number (8.8 per 10,000 incorporated business versus 8.2 per 10,000). The difference, however, is that Japanese combinations are of much smaller size. Another difference is that very few of these combinations involve a foreign bidder (Kester, 1991, p.13 7).

The relatively lowfrequencyof occurrence between large companies in Japan is traced by Kester to the Japanese governance system. An important element of that system has been the close relationship between companies and banks. The system, however, is evolving. The build-up of financial slack in the balance sheets ofJapanese firms and the globalization of financial markets have created pressures for increasing returns to shareholders and have contributed to the expansion of efforts to enlist many more alternatives than what was previously considered as acceptable (Kester, 1991, p.187). Domestic and international conditions have led to consolidation in certain industries (Mergers andAcquisitions, 1994a, pp.16-17).

Japanese merger and acquisition activity abroad has been limited as a result of the emergence of certain factors. These factors have included the increase in the cost of capital, the sagging Japanese economy, and the lack of faith in the ability of some foreign governments to improve their economic performance through fiscal restraint. They have contributed to a decreasing interest in Europe and a continuation of emphasis on the United States (Neuhauser and Cowley, 1992).

Additional elements confronting foreign bidders in Japan have included the fact that Japanese firms have not in general been available for sale, that acquisitions for the most part take place along the lines of the particular keiretsu, that acquisitions carry the stigma of the "loser" because of the proximity of the target to bankruptcy, and general opposition toward foreign acquisitions that are perceived to be against the strategic interests of the target or the nation (Schlossstein, 1989, pp.309-310).

Volume 23 Number 3 1997

83

c. The new economicpowers: Korea

As the wave offinancialliberalization is sweeping across much ofthe world, barriers to merger and acquisition activity are being gradually torn down. Regulatory and cultural factors had closed the Korean market to foreign companies until the late 1980s. In the 1990s, however, the restructuring market started showing some signs of life. Moskowitz (1993, p.45) points to five factors responsible for restructuring activity:

1. Relaxation of regulation. The elimination of regulatory barriers in many industries has allowed new entries, especially through acquisitions.

2. Government mandate. Since 1991, government policies encouraged di- versified firms to emphasize their "core" business. The mandate can then be used as an excuse for divestitures.

3. Economic conditions. The slowdown of economic activity forced many firms to increase their profitability by getting rid of some marginal op- erations.

4. Changing markets. Increasing competition has put pressure on many Ko- reanfirmsto restructure and emphasize their mail line of business.

5. Changing business culture. Some of the traditional ways of doing busi- ness are fading away. The concern to behave according to expectations is being gradually replaced by the reality of today's global business envi- ronment.

As the environment is changing, foreignfirmswillfindit increasingly easier to enter the market through acquisitions ofjoint ventures.

d. Developing countries

The status of merger and acquisition activity in developing countries is not easily identifiable because of lack of adequate data and the continually changing environ-

ment. In general, merger activity seems to be slow so far, but expected to accelerate.

A

United Nations Report notes the need for a case by case analysis ofthe environment

in

various countries andregions.These general comments are offered, however:

Merger activity in Latin America has been significant. The difficulties of the 1980s were accompanied by divestitures by multinationals. Subsidiaries were being sold to local interests or other multinationals. Some of the takeover activity in countries such as Brazil and Chile was financed through debt- equity swaps.

Limited domestic merger activity has been taking place in Hong Kong, Malaysia, Singapore, and the Philippines. In addition, takeovers of local companies by compa- niesfromdeveloped countries have also been observed. A more recent phenomenon

is the role ofthe localfirmas a buyer ofafirmfroma developed country. As the UN

Report indicates, 16 takeovers in the United States in 1989 were accomplished by

Volume 23 Number 3 1997

84

firms based in Hong Kong, four by Taiwanesefirms,and four by Singaporean firms (UNCTD, 1993, p.11).

Takeover activity involving African firms from various countries has been limited to certain sectors, such as food processing (Zimbabwe) and pharmaceuticals (Senegal). Foreign firms have also selected specific sectors, such as transport in Zambia or textiles in Togo. As the situation involving South Africa is changing, that country is also expected to have a presence in the takeover market (UNCTD, 1993).

X. Concluding Remarks

This survey presented some of the issues pertinent to international mergers and acquisitions. The subject is indeed multifaceted and complicated. As future global economic developments unfold, firm restructuring will be undoubtedly affected further. As regulatory, institutional, technological, and market-related changes take place, we will witness new horizons opening up for merger and acquisitions activity. Finally, as we learn more about managing today's enterprises and as we enter into a more competitive world, the role of mergers and acquisitions will also change.

Appendix I

Major Merger Trends in the US

The history of restructuring in the US has been a colorful one, exhibiting various levels and forms of activity. Thus, the American experience has been portrayed as comprised of four major periods. The diversity of the form encountered is depicted in the list of the top deals in 1993. Included in the year's largest deals, Merck's acquisition ofMedco Containment Services for $6.23 billion was a stock swap, Martin Marietta's took over GE's Aerospace Division for approximately $3 billion as a result ofdivestiture, while Sears, Marriott, and Humana entered the market through spinoffs.

Thefirstmajor merger experience commenced about a century ago (1897-1904), ironically after the country had embarked on the antitrust era ushered by the passage ofthe Sherman Act of 1890. The period lasted through the early 1900s, when the first recession of the century settled in, and featured business combination activities that produced such giants as US Steel, American Tobacco, and Standard Oil to capture the lion's share of their respective markets.

As the economy started rebounding after the end of WWI, another merger wave unfolded (1916-1929). Improvements in transportation and communication networks and increased sophistication in marketing method's facilitated expansions. The wave abated toward the end of the decade, having impacted many important sectors, including food processing, chemicals, and public utilities. As the Clayton Act of 1914 discouraged monopolies, a number of oligopolistic market structures took form.

The periodfrom1965 to 1969 witnessed the third major merger wave. The period became known for the creation of conglomerates, formed to take advantage of the benefits of diversification. Many of conglomerates underperformed, however, as the expected benefits were overshadowed by the costs necessitated to manage them

Volume 23 Number 3 1997

85

properly. As noted previously, some of the mergers of the period were motivated by the existence of "Price-Earnings Magic" (Conn, 1973).

The 1980s were by far the most sensational period of corporate restructuring. Debt and equity market conditions and a conducive socio-political and regulatory environment contributed to what we refer to as the "decade of the deal," and to a change in the financial industry landscape. The decrease in debt availability and the advent of recession at the end of the decade brought an end to this distinctive period.

Mergers, acquisitions, and similar activity seemed to recover in 1993. The year's activity included some large transactions, such as Merck's acquisition of Medco Containment Services for $6.23 billion and Columbia Hospital's Acquisition ofGalen Health Care for $4.19 billion. There was wide representation of industrial sectors, with industries such as health care, telecommunications, and defense being particu- larly prominent.

Sources: Gaughan, 1991, Chapter 2; Petty, et al., 1993, Chapter 23.

Volume 23 Number 3 1997

86

Endnotes

1. Privatizations and strategic alliances, although forms of restructuring, will not be considered.

2. The premium represents only one indication of the price of the transaction. When

a stock swap has taken place, large premia may not be evident because ofthe treatment

of the deal as poolings

of interest. See Mergers and Acquisitions, 1994b.

References

Austin, C.E. 1992. "Drawing a Regulatory Road Map from the Hanson-Beazer Merger." Mergers & Acquisitions. July/August, pp.48-52.

Brown, M.M. and MacLachlan, S., 1991. "Legal Headaches for Buyers Going Into Foreign Lands." Mergers & Acquisitions. March/April, pp.57-63.

Bibler, R.S. "The Acquisition Process: A Program for Success." in Key, S.L. (editor). The Ernst & YoungManagement Guide to Mergers andAcquisitions. New York: John Wiley & Sons, pp.3-16.

Binggeli, H., 1990. "Purchase Price Protection in Overseas Acquisitions." Mergers & Acquisitions. September/October, pp.67-71.

Conn, R., 1973. "Performance of Conglomerate Firms: Comment." Journal of Fi- nance, pp.754-758.

Conn, R.L., and Connell, F., 1990. "International Mergers: Returns of US and British Firms." Journal ofBusiness Finance & Accounting. Winter, 17(5), pp.689-710.

Connell, F., and Conn, R.L., 1993. "A Preliminary Analysis of Shifts in Market Model Regression Parameters in International Mergers Between US and British Firms:

1970-1980." Managerial Finance. Volume 19, 1, 1993, pp.47-77.

Corrigan, T. 1993. "International Mergers and Acquisitions." Financial Times, Sep- tember 17, Special Section.

Gaughan, P.A., 1991. Mergers & Acquisitions. New York: Harper Collins Publishers, especially Chapters 1 & 2.

Harris, E.G., 1994. "Why One Firm is the Target and the Other the Bidder in Single-Bidder, Synergistic Takeovers." The Journal ofBusiness. April, pp.263-280.

Harris, R.S., and Ravenschaft, D., 1991. "The Role of Acquisitions in Foreign Direct Investment: Evidencefromthe US Stock Market." Journal ofFinance. July, pp.825-

844.

Hogan, S.D., and Huie, M., 1992. "Is a Deal Killer Lurking in Europe's Merger Control Rule?" Mergers & Acquisitions. September/October, pp.45-49.

Volume 23 Number 3 1997

87

Holmes, G. 1991. "Europe's Agents ofChange." Mergers & Acquisitions. May/June,

pp.7-9.

Holmes, G. 1993. "A Swift Pace of Cross-Border M&A." Mergers & Acquisitions. May/June, pp.21-28.

Kacker, M. 1990. "The Lure of US Retailing to the Foreign Acquirer." Mergers & Acquisitions. July/August, pp.63-68.

Kang, J.K., 1993. "The International Market for Corporate Control: Mergers and Acquisitions of US Firms by Japanese Firms." Journal of Financial Economics, December, 34, pp.345-371.

Kester, C.W., 1991. Japanese Takeovers: The Global Questfor Corporate Control. Boston: Harvard Business School Press.

Kissin, W.D., and Herrera, J., 1990. "International Mergers and Acquisitions." The Journal ofBusiness Strategy. July/August, pp.51-54.

Leighton, L.W., 1993. "How Culture Clashes Can Ambush the Unwary Buyer Going Abroad." Mergers & Acquisitions. March/April, pp.26-29.

Marks, M.L., and Mirvis, P.H., 1993. "The Stiff Challenge in Integrating Cross-Bor- der Mergers." Mergers & Acquisitions. January/February, pp.37-41.

Mergers & Acquisitions, 1989. "Have Europe's Top Acquirer Added Shareholder Value?" March/April, pp.60-68.

.

1993. "Dropping Out Before the Race is Over." May/June, 1993, pp.31-32.

.

1994a. "Scoreboard." March/April, p.58.

.

1994b. "A Year-End Surge in M&A Dollar Value." March/April, pp.61-69.

.

1994c. "Crash on the Highway - And Other Mishaps. " May/June, pp.29-30.

.

1994d. "Cross-Border M&A." May/June, p.61.

Moskowitz, K., 1993. "Why the Barriers to M&A are Crumbling in South Korea." Mergers & Acquisitions. July/August, pp.44-50.

Neuhauser, L., and Cowley, N., 1992. "Why Japanese Firms Have Pulled Back on Overseas Buying." Mergers & Acquisitions. November/December, pp.13-17.

O'Rourke, T.J., 1989. "Postmerger Acquisition." in Key, S.L. (editor). The Ernst & Young Management Guide to Mergers and Acquisitions. New York: Wiley & Sons,

pp.227-228.

Volume 23 Number 3 1997

88

Petty, W.J., A.J. Keown, D.F. Scott, Jr., and J.D. Martin, 1993. Basic Financial Management. Englewood Cliffs, NJ: Prentice Hall, esp. Chapter 23.

Post, A.M., 1994. Anatomy of a Merger: The Causes and Effects of Mergers and Acquisitions. Englewood Cliffs, NJ: Prentice Hall, especially Chapters 1 & 2.

Price Waterhouse, 1991. Doing Business in the European Community.

Roll, R., 1986. "The Hubris Hypothesis ofCorporate Takeovers." Journal of Business. April, 58, 2, pp.197-216.

Scharf, C.A., E.E. Shea and G.C. Beck, 1991. Acquisitions, Mergers, Sales, Buyouts and Takeovers: A Handbookwith Forms. Fourth Editions. Englewood Cliffs: Prentice Hall.

Schlossstein, S., 1989. Japan, in Key (editor) The Ernst & Young Management Guide to Mergers andAcquisitions.

Spiegel, D.L., Berg, A.g., and Southwick, J.D., 1992. "How Foreign Buyers Can Avoid Exon-Florio Pitfalls." Mergers & Acquisitions. March/April, pp.40-46.

Transnational Corporations and Management Division, 1992. World Investment Report 1992: Transnational Corporations as Engines ofGrowth. New York: United Nations, Department of Economic and Social Development.

United Nations Conference on Trade and Development, 1993. Concentration of Market Power, through mergers, takeovers, Joint ventures and other acquisitions of control, and its effects on international markets, in particular the markets of devel- oping countries. New York: United Nations.

Weston, F.J., K.S. Chang, and S.E. Hoag, 1990. Mergers, Restructuring, and Corpo- rate Control. Englewood Cliffs, NJ: Prentice Hall.

Yokose, K. 1988. "A Reluctant Acquirer's Commitment to Integration." Mergers & Acquisitions. July/August, pp.71-72.