some hidden assumption or bet about the future of a country market. Since 1945, local product and financial markets have trended toward greater integration with global markets. Integration brings with it economic benefits as well as costs to the local markets and institutions. One should have a view about the direction and pace of integration within home and foreign countries. This chapter will sketch some steps for country analysis.
Affect analysis. It is a mistake to think that cross-border M&A is like domestic M&A, but with different-looking currency. In fact, going across borders requires adjustments in the valuation frameworks and analysis that one takes for granted in assessing domestic deals. Necessary adjustments in cash flows and discount rates can change the conclusions about a deal dramatically. Chapter 13 discusses the special adjustments for valuation across borders.
CROSS-BORDER M&A ACTIVITY
The volume of cross-border M&A transactions has risen to record levels in recent years. Exhibit 5.1 presents the trends of transactions involving a U.S.-based buyer or target:
Number of deals. Columns 1, 2, and 3 show that the volume of transactions by number of deals more than doubled from 1991 to 2000—and then fell to half by 2002. Classifying by whether the deal was “inbound” (i.e., where a U.S. firm was the target) or “outbound” (i.e., where a U.S. firm was the buyer) reveals that the biggest growth in the 1990s occurred in the number of outbound deals.
Dollar value of deals. Columns 4, 5, and 6 show huge increases in the dollar value of cross-border deals. In all years but two, the value of inbound deals has been greater than outbound deals (i.e., reversing the observation based on number of deals). Comparing the data on number of deals and value of deals, it appears that U.S. buyers have bought a larger number of smaller foreign targets, while foreign buyers have bought a smaller number of larger U.S. targets.
Cross-border volume relative to total M&A volume. Columns 7 and 8 present the percentage of cross-border deals relative to total amounts for U.S.-based deal volume. The cross-border number of deals represents between 17.6 and 25 percent of the total. And comparing the dollar volumes with the total inbound and outbound foreign direct investment (FDI) in the United States, M&A volume accounts for the bulk of FDI.1
Looking beyond the confines of U.S.-related deals, the United Nations Conference on Trade and Development (UNCTAD) estimates that cross-border acquisition is the largest medium of foreign direct investment, accounting for 55 to 60 percent of the totals.2 The volume of cross-border M&A is even larger if one considers other kinds of corporate transactions (e.g., joint ventures and project financings) possibly as partial or creeping acquisitions.3 However, by any measure, cross-border M&A is sizable, and is a material element of all (i.e., domestic and cross-border) M&A activity.
Cross-border transactions have a different profile compared to domestic deals. Researchers have found that cross-border deals are:
More related. Cross-border acquisitions tend not to represent diversification far beyond the buyer’s core industry. Acquisitions into related businesses represent 60 to 75 percent of cross-border deals.4
Payment is mainly in cash. Many cross-border buyers do not have shares listed for trading in the foreign market. Therefore, it is not surprising that buyers tend to pay with cash rather than stock.5
Targets are mainly manufacturing firms with low intangible assets. Conn and Nielsen (1990) found that 97 percent of U.S. firms’ targets and 74 percent of U.K. firms’ targets were in manufacturing rather than finance or services.
EXHIBIT 5.1 Trends in Completed Cross-Border Mergers and Acquisitions Involving a U.S.-based Buyer or Target
| Column | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
|---|---|---|---|---|---|---|---|---|---|---|
| Number of Cross-Border Deals | Value of Cross-Border Deals | Cross-Border Deals as a Percentage of All Transactions (Domestic and Cross-Border) | Value of All Foreign Direct Investment into and out from the United States | |||||||
| Total Number | Number of Inbound Deals | Number of Outbound Deals | Total Value (Billions) | Value of Inbound (Billions) | Value of Outbound (Billions) | % of Number of Deals | % of Total Value | Inbound U.S. FDI (Billions) | Outbound U.S. FDI (Billions) | |
| 2002 | 1,489 | 649 | 840 | $107.0 | $ 65.0 | $ 42.0 | 17.6% | 10.8% | $ 39.6 | $137.8 |
| 2001 | 2,063 | 888 | 1,175 | $216.0 | $118.4 | $ 97.6 | 20.3% | 14.3% | $157.9 | $156.0 |
| 2000 | 3,259 | 1,391 | 1,868 | $433.8 | $311.5 | $122.3 | 24.0% | 13.7% | $287.7 | $152.4 |
| 1999 | 2,701 | 1,059 | 1,642 | $349.9 | $229.9 | $120.0 | 25.0% | 23.2% | $282.5 | $155.2 |
| 1998 | 2,630 | 884 |
|
