METHODS TO CONDUCT IB

Acquisitions Firms acquire other enterprises in foreign countries as a tool of penetrating foreign markets. The overseas acquisitions by Indian corporates which started of on a small scale, have now reached to globally visible levels. Report of the Boston Consulting Group (BCG) on the emerging multinationals in the world puts 21 Indian companies among the top 100 such multinationals. Only China with 44 companies is ahead of India.

METHODS TO CONDUCT IB
The BCG research has shown that 88% of the emerging market global players in India are driven by the need to gain access to new markets and profit pools. Overseas markets are expected to bring higher margins, revenue and volumes, besides opportunities for further growth. The acquisition of RPG (Aventis) in France by Ranbaxy makes it the countrys largest generic supplier. Tata Motors sells its passenger car Indica in the UK through a marketing alliance with Rover and has acquired a Daewoo Commercial Vehicles unit giving it access to markets in Korea and China.

Acquisitions by Indian companies overseas

Company
Reliance Industries

Acquisition
Flag Telecom, Bermuda Trevira, Germany

Price (in USD million)

212 95

Tata Motors
Infosys Technologies Bharat Forge Ranbaxy Wockhardt Cadila Health Hindalco Wipro Aditya Birla

Daewoo, Korea
Expert Information Services, Australia Carl Dan Peddinghaus, Germany RPG (Aventis) Laboratories, France CP Pharmaceuticals, UK Alpharma SAS, France Straits Ply, Australia Nerve Wire Inc, US Dashiqiao Chem, China

118
3.1 NA NA 18 5.7 56.4 18.5 8.5

M & A and PE of INDIAN COMPANIES

 M and M acquired a 70% stake in Ssangyong and out of the total cost of acquisition of $ 463 million (about Rs 2,105 crore), $ 378 million will be in in new stocks and $ 85 million will be in corporate bonds. The acquisition would help M and M launch South Korean company's flagship SUV models Rexton II and Korando C - into the Indian market. Mahindra-Ssangyong deal will provide a new growth avenue for Ssangyong and further strengthen M&M's dominant position in the UV segment.

M and M

Vedanta - Cairn buyout

Billionaire Anil Agarwal-led Vedanta group's $ 8.6 billion acquisition of Cairn India has become the biggest M&A deal ever in the Indian energy sector. The Home Ministry, while giving the security no-objection certificate (NOC), highlighted eight areas of concern, including 64 legal proceedings against Vedanta and its subsidiaries in various courts.

GVK Power $1.26 billion acquisition of Hancock Coal

GVK Power acquired Australia's Hancock Coal for $1.26 billion, in one of the largest overseas acquisitions by an Indian infrastructure entity. The deal will offer the Hyderabad-based company option for long term coal supply contracts for the purchase of up to 20 million tonnes every year. This can support around 7,500 megawatts of power generating capacity.

Adani Enterprises $2 billion acquisition of Abbot Point coal terminal

The deal will help the Adani Group ship out coal from an Australian mine it has acquired last year. This deal marked the third overseas acquisition in nine months by the group that runs the country's biggest private port and is India's largest coal importer. According to Adani Group, the deal was one of the largest port acquisitions in the world and the group had now emerged as the largest Indian investor in Australia now.

MNC
An MNC is an enterprise that manages production or delivers services in more than one country. By practice, a MNC has its top management corporate office in one country, called the home country, and operates in several other countries, called the host countries. Examples of MNCs are General Electric, Wal-Mart, Kentucky Fried Chicken, Honda Motors, McDonalds, Boeing, Microsoft, Apple, Adidas, Siemens etc. By definition MNCs must have substantial direct investment in foreign countries and must be engaged in the active management of the overseas assets.

MNC
Typically a MNC develops new products in a home country, transfer the technology to its subsidiary or a joint venture and manufactures them in the host country which will invariably be a third world country, thus gaining trade advantages and economies of labour, material and taxation benefits. Access to low cost production and cost optimization is a key to the success of a MNC. The motivation to internationalize the operations stems from the fact of exploiting the advantages of competitive positioning.

MNC
Ethnocentric MNCs are those that adopt home oriented policy and seldom distinguish between domestic operation and global operation. However, ethnocentric focuses on race or ethnicity, especially when the home country itself is populated by many different races. Polycentric MNCs operate in foreign countries just to meet the demand for its products, goods and services in that country and follow a host market oriented policy. Geocentric MNCs maintain a balance between the Ethnocentric and Polycentric and fit between home market and host market oriented policies.

MNC
New MNCs do not popup all of a sudden in a foreign country. Location of a MNC is the result of conscious planning by corporate managers. Generally, investment flows from regions of low anticipated profits to those of high returns. A MNC may have reached a plateau satisfying domestic demand, which is not growing and hence may be looking for newer markets. MNC realizes that foreign direct investment is one of the ways to expand bypassing protective instruments in the importing country.

Factors affecting MNCs mobility

When an MNC attempts to maximize its shareholders wealth, it is confronted with several constraints that include environmental, regulatory and ethical issues. The environmental constraints faced by a MNC and its subsidiaries located in a foreign country include violation in the construction of building as per the local laws, not adhering to the pollution control norms as stipulated by the state and nondisposal of production waste as per the international standards.

Factors affecting MNCs mobility

Operating in many countries, MNCs are subject to multiple tax controls. They have to pay taxes to several countries in which they operate as per the applicable tax laws. The taxation policies and the tax rates are exceedingly complex and differ from country to country. Apart from taxation regime, each country enforces its own regulatory constraints pertaining to currency convertibility clauses, earning remittance restrictions, and other regulations that have a direct bearing on the profitability of a subsidiary company located in the host country.

Factors affecting MNCs mobility

Since countries have different tax rates, MNCs choose low tax countries to save, invest, and produce. Governments may compete to attract MNC enterprises by offering them lower tax rates and other incentives. This is called tax competition. Since high tax countries lose lucrative businesses, they would like to harmonize the tax rates, especially within a free trade zone or special economic zone. Both domestic and foreign source income of US companies are subject to income tax. The US government taxes both domestic and foreign source incomes of US based MNCs.

Factors affecting MNCs mobility

Another important issue is the ethnic constraints faced by the MNCs. A business practice that is considered to be unethical in one country may be totally ethical in another country. Margin calls in the forex trade is considered as unethical in India, while it is perfectly legal in US and all other European countries. Payment of bribes by the US based MNCs is considered an illegal practice in the US. Bribes to government machineries are a common occurrence in all the third world countries to conclude a contract or seek favour from them.

Factors affecting MNCs mobility

When MNCs enter a foreign market to sell its products, the demand for these products is dependent on the economic conditions of the host countries. Classic example is the collapse of the Asian market during the year 1997-98. The South Korean Won depreciated by more than 20% against the dollar, whereas the Indonesian Rupiah depreciated by about 80% against the dollar. When MNCs establish subsidiaries in foreign countries they are exposed to all sorts of political risks. The extreme form risk is the host country changing the rules of the game and the affected parties have very limited options.

Enron
Enron project : No competitive bidding for the project the deal was negotiated exclusively between the Maharashtra government and Enron Project cost and power tariff higher than other power projects in India Maharashtra State Electricity Board promised to buy all the highpriced power produced by Enron, whether there was demand or not, and even if cheaper power were available from its own generating plants. These contracted annual payments to Enron would amount to half of Maharashtras entire budget expenditure. DPC was assured a post tax return of 16 percent on capital investment, and there was no limit on the capital expenditure Enron could make. Indian economists calculated that the after-tax rate of return would actually be 32 percent, about three times the average rate in the US Counter guarantees from the state and central governments for payments which would have been due to DPC from the MSEB.

Enron
Contract shields Enron from Indian jurisdiction as all disputes must be settled under English law in England. Assurance was given that the project would not be nationalized Project authorities carried out no environmental impact assessment Enron paid USD 20 million as educational gifts. Critics consider these payments to be bribes to clear the project. Power purchase agreement between the DPC and MSEB was initially kept secret from the public. Enrons financing package for Dabhol Phase II, a complex transaction totaling $1.87 billion, won international praise as one of the best international project financing deals ever put together.

Transnational Corporations
Transnational Corporations (TNCs) operate world wide without being identified with a home base. TNCs have no borders and the whole world is their home. Many of these companies have far more power than the nation-states across whose borders they operate. For example, the combined revenues of just General Motors and Ford; the two largest automobile corporations in the world exceed the combined Gross Domestic Product (GDP) for all of sub-Saharan Africa. The combined sales of Mitsubishi, Mitsui, ITOCHU, Sumitomo, Marubeni, and Nissho Iwai, Japans top six Sogo Sosha or trading companies, are nearly equivalent to the combined GDP of all of South America. Overall, fifty one of the largest one hundred economies in the world are TNCs. The revenues of the top 500 corporations in the U.S. equal about 60 % of the countrys GDP. Transnational corporations hold 90 % of all technology and product patents worldwide, and are involved in 70 % of world trade.

Globalization of Business
Globalization is defined as the reduction of transaction cost of trans-border movements of capital and goods. The process of globalization not only includes opening up of world trade, development of advanced means of communication, internationalization of financial markets, growing importance of MNCs, population migrations and more generally increased mobility of persons, goods and capital. The new global economy of the twenty-first century has transformed the economic, social, educational and political landscape in a profound and indelible manner.

Globalization of Business
India clearly lags in globalization. Over the past decade, FDI flows into India have averaged around 0.5% of GDP against 5% for China and 5.5% for Brazil. Whereas FDI inflows into China now exceeds USD 100 billion annually, it is only USD 24 billion in the case of India. Indias share of global trade is similar to that of the Philippines an economy 6 times smaller according to IMF estimates.

Case Study 2
The internet is a global network connecting millions of computers. Unlike online services, which are centrally controlled, the internet is decentralized by design. The advent of internet has ushered in a new era in international business and has radically changed the world.

Case Study 2
Questions What are the kinds of developments you see ahead? Has internet ushered in a level playing field and democratized the global market? With internet expected to penetrate every home in the continent, will international business assume greater significance. How does MNCs meet up with the ever growing challenges of internet and modern technologies? With several and political issues looming large over the MNCs, can they survive in a hostile host country?

Valuation Models
Domestic enterprise The value of a domestic enterprise can be defined as the present value of its expected cash flows where the discount rate identified to discount the forecasted cash flows is the weighted average cost of capital and represents the required rate of return by the investors on investments of equivalent risk.

Domestic Enterprise VM
The valuation can be represented as: n V = [ E ( C F $,t) ] t = 1 --------------------( 1 + k) t Where E(C F $ , t ) represents expected cash flows to be received at the end of period t n represents the number of periods into the future in which cash flows are received k represents the required rate of return by the investors. The actual cash flows in period t represents the funds received by the enterprise less the finds needed to meet the expense, taxes or ploughing back into the enterprise for purpose of modernization, diversification or expansion.

E ( C F $ , t ) = [E ( C F j , t ) x E ( ER j , t )] J=1

MNC VM

CF j , t is the amount of cash flow denominated in a particular foreign currency j at the end of period t ER j , t is the exchange rate at which the foreign currency can be converted into dollar at the end of period t MNC doing business in two currencies can measure its dollar cash flows by multiplying the expected cash flows with the expected exchange rate at which the currency could be converted to dollars and then summing these two products. If the MNC does not hedge its transactions in foreign currencies, the expected exchange rate in a given period can be used in the process of valuation to estimate the corresponding expected exchange rate at which the foreign currency can be converted into dollars in that period. If the MNC hedges the transactions, the exchange rate at which it can hedge can be used in the valuation equation.

MNC VM
Consider a MNC with its head quarters in the US that has an expected cash flow of USD 500,000 from business in the home country and Rs. 8 crores from business in India at the end of period t. Determine the expected dollar cash flow of the MNC if the rupee value is expected to be USD 0.0158.

MNC VM E ( C F $ , t ) = [E ( C F j , t ) x E ( ER j , t )] = (USD 500,00) + (INR 80,000,000 x 0.0158)

= (USD 500,000) + (USD 1,264,000)

= USD 1,764,000