BUSN 320 Week 8 Discussion Board

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Business Finance

BUSN 320

Regent University

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Today we find a number of US multinational organizations have listed their stocks and bonds on international exchanges throughout the world. In an initial post of 300 words or less, what are some of the risks and benefits from these multiple listings? What are some examples of corporations being listed in specific international exchange markets?

- 200-300 words

- Utilize the required readings as a base, cite appropriate examples/principles from the texts and include a minimum of two academic peer reviewed scholarly articles that bring depth and insight to the dialogue.

Block, S.B.; Hirt, G.A. & Danielsen B.R. (2016). Foundations of Financial Management. New York: McGraw-Hill 16thEdition

Read: Block & Hirt, Chapters 20 - 21

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20 External Growth through Mergers Block, Hirt, and Danielsen Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Outline • Motives for mergers • Acquiring companies through cash or exchange of shares • Potential impact of mergers on earnings per share and stock value assessment • Diversification benefits • Unfriendly buyouts Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-2 Largest Acquisitions Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-3 Business Combinations • Business combination can be either merger or consolidation • Merger • Combination of two or more companies, resulting firm maintains identity of acquiring firm • Consolidation • Two or more companies combine to form new entity • Utilized when firms have equal size, market power Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-4 Financial Motives • Merger allows acquiring firms to enjoy potentially desirable portfolio effect • Achieves risk reduction while maintaining firm’s rate of return • May reduce performance variability for firms with opposite phases of business cycle • Practicalities complicate portfolio diversification • Improves financing posture as result of expansion Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-5 Financial Motives (cont’d) • Larger firms may enjoy greater capital market access • Attracts larger and more prestigious investment bankers to handle future financing • Greater financing may also be inherent in merger itself, if • Acquired firm has strong cash position • Low debt-equity ratio can be used to expand borrowing by acquiring firm Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-6 Tax Loss Carryforward • Available in merger if one firm has previously sustained tax loss • Firm A acquires Firm B; B has $220,000 tax loss carry forward; A’s before-tax income without merger is $300,000 • Assume firm has 40% tax rate. Tax shield value of carryforward to Firm A = loss times tax rate ($220,000 × 40% = $88,000) • Company can reduce total taxes from $120,000 to $32,000, could pay $88,000 for carryforward alone • Income available to stockholders increased by $88,000 • Consider Firm B’s anticipated operating gains and losses for future years when analyzing deal Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-7 Tax Loss Carryforward (cont’d) Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-8 Nonfinancial Motives • Desire to expand management, marketing capabilities, acquisition of new products • Integration can be vertical or horizontal • Antitrust policy generally precludes eliminating competition • Management motivation — synergistic effect • Eliminates overlapping functions • Meshes various engineering capabilities Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-9 Motives of Selling Stockholders • Desire to receive acquiring company’s stock • Stockholders can diversify holdings into new investments if cash offered • Officers may receive attractive post-merger management contracts along with directorship of acquiring firm Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-10 Cash Purchases • Instead of purchasing new plant or machinery, purchaser may opt to acquire going concern • Firm A considering acquisition of Firm B for $1 million. Firm B has expected cash flow (after-tax earnings plus depreciation) of $100,000 per year for next 5 years; $150,000 per year for 6th through 20th years • Synergistic benefits add up to $10,000 per year to cash flow • Firm B has $50,000 loss carryforward for immediate use. With 40% tax rate, this shields $20,000 profit from taxes • Firm A has 10% cost of capital, remains stable through merger Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-11 Cash Purchases (cont’d) • Present value factor for first five years based on n = 5, i = 10%. 6th through 20th years, present value factor for n = 20, i = 10% and subtract present value factor for n = 5, i = 10% * * Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-12 Cash Purchases (cont’d) • Acquisition seems like desirable option with positive net present value Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-13 Stock-for-Stock Exchange • When exchanging securities, impact on earnings per share emphasized • Shareholders of acquired firm concerned with • Initial price paid for shares • Outlook for acquiring firm • Analysis made mainly from firm’s viewpoint Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-14 Financial Data on Potential Merging Firms Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-15 Postmerger Earnings Per Share • Earnings per share of Expand Corporation increase as result of merger • When firm acquires another entity with lower P/E ratio, earnings per share immediately increase Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-16 Possibilities of Mergers based on Stockfor-Stock Exchanges • Acquiring firm increases immediate earnings per share as result of merger • May slow future growth rate if buying less aggressive firm • Acquiring firm may dilute immediate postmerger earnings per share by paying high price • Increase potential growth rate for future by acquiring rapidly growing firm Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-17 Portfolio Effect • Reduction or increase in risk may influence P/E ratio as much as change in growth rate • If overall risk reduced, post-merger P/E ratio increases, market value may increase • With less firm risk, investor may assign higher valuation, increasing P/E ratio Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-18 Risk-Reduction Portfolio Benefits Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-19 Accounting Considerations in Mergers and Acquisitions • Pooling of interests (prior to 2001) • Acquiring firm issues only common stock in exchange for most of other firm’s voting stock • Acquired firm’s stockholders maintain ownership position in surviving firm • Combined entity does not intend to dispose of large portion of merged firm assets within two years • Combination effected in single transaction Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-20 Accounting Considerations in Mergers and Acquisitions (cont’d) • Purchase of Assets (prior to 2001) • Goodwill may be created when purchase of assets involved • FASB put SFAS 141 and SFAS 142 in place June 2001 to eliminate pooling of interests accounting, change treatment of goodwill • Merger-related goodwill no longer amortized, instead placed on balance sheet of acquiring firm at time of acquisition • Merger-related goodwill not written down unless impaired Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-21 Evaluation of Goodwill • Fair value of goodwill determined by taking present value of future cash flows, subtracting liabilities • If goodwill impaired, part must immediately be written down against operating income • FASB allows companies to take one-time writedown of all past goodwill impairments at time of firm adoption Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-22 Negotiated versus Tendered Offers • In negotiated offers, exchange ratio based on product lines, asset quality, future growth prospects • Takeover tender offer — attempt by company to acquire target firm against its will • “Saturday night special” — surprise offer made just before market closes for weekend Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-23 Avoiding Tendered Offers • Management may turn to white knight • Third firm called by management to help avoid initial unwanted tender offer • Moving corporate offices to states with tough prenotification and protection provisions regarding takeover bids • Buying back some of own shares to restrict amount of stock available for takeover Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-24 Protective Measures against a Takeover Tender Offer • Encouraging employees to buy stock under pension plans • Increasing dividends • Staggering board of directors member elections • Avoiding large cash positions • Poison pill effective for protection Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-25 Premium Offers and Stock Price Movements • Most mergers not acquired at current market value • Merger premium of 40-60% (or more) paid over pre-merger price of acquired company • Disadvantage • Much of upside movement may occur before public announcement • Advantage • Good profits can be made after merger accomplished Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-26 Premium Offers and Stock Price Movements (cont’d) • Trouble with any merger-related investment strategy • Merger may be called off • Merger candidate’s stock may fall to original value • Price may quickly rebound if merger negotiation with another company Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-27 Two-Step Buyout • Acquiring company attempts to gain control • Offers very high price for 51% of shares outstanding • Announces second, lower price paid off late, either in cash, stock, or bonds • Buyout procedure accomplishes two purposes • Provides strong inducement to stockholders to quickly react to offer • Allows acquiring firm to pay lower total price than if single offer made Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-28 Two-Step Buyout (cont’d) • SEC keeps close eye on this method • Fears smaller stockholders may not be informed enough to keep up with institutional investors • Emphasizes need for pro rata stockholder order processing • Each stockholder receives equal percentage of shares tendered Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 20-29 21 International Financial Management Block, Hirt, and Danielsen Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter Outline • Multinational corporations • Effect of exchange rates on profitability and cash-flow • Hedging and reduction of foreign exchange risk • Evaluating political risk in foreign investment decisions • Financing international operations 21-2 Growing Interdependency • Necessitates sound international business relations to enhance prospects for future international cooperation • Integrates capital markets • Currency crises, government defaults, terrorism can cause markets to suffer declines beyond expected impact • Currency markets • Impact on trade between nations affecting sales and earnings of international companies • Advent of Euro • Severe impact on earnings of U.S. companies doing significant business in Europe 21-3 International Sales of Selected U.S. Companies Company Foreign Sales (% of total sales) Fiscal Year-End Coca-Cola 65.8 31-Dec-11 ExxonMobil 83.8 31-Dec-11 General Electric 54.2 31-Dec-11 IBM 65.4 31-Dec-11 Johnson and Johnson 56.3 31-Dec-11 JPMorgan Chase 25.0 31-Dec-11 McDonald's 68.4 31-Dec-11 Microsoft 47.1 30-Jun-11 Procter & Gamble 59.0 30-Jun-11 21-4 The Multinational Corporation • Firm carrying out business activities (often 30% or more) outside its national borders • Can take several forms • • • • Exporter Licensing agreement Joint venture Fully-owned foreign subsidiary 21-5 Forms of Multinational Corporation • Exporter • Least risky method • Reap benefits of foreign demand • No long-term investment commitment • Licensing agreement • License granted to local manufacturer in foreign land to use firm’s technology • Effectively exporting technology • Collects licensing fee or royalty • Joint venture • Established with local firm in foreign land • Most preferred by business firms and foreign governments • Least political risk 21-6 Forms of Multinational Corporation (cont’d) • Fully-owned foreign subsidiary • • • • Higher risks and operation complexities Often more profitable than domestic firms Lowers combined portfolio risk of parent corporation Decisive factor in shaping pattern of trade, investment, and technology flow • Exert significant impact on host country’s economic growth, employment, trade, balance of payments 21-7 Exchange Rates • Relationship between values of two currencies • For example, quotation of $2.00 per pound same as £.50 per dollar (1/$2.00) 21-8 Exchange Rates to the Dollar 21-9 Exchange Rates to the Dollar (cont’d) 21-10 Exchange Rates to the Dollar (cont’d) 21-11 Exchange Rates to the Dollar (cont’d) 21-12 Factors Influencing Exchange Rates • Inflation • Parity between purchasing power of two currencies establishes rate of exchange between currencies • $1.00 buys one apple in New York, 1.25 euros buys one apple in Germany. Rate of exchange between USD and Euro is €1.25/$1.00 or $.80/euro • Purchasing-power-parity theory • Currency exchange rates vary inversely with respective purchasing powers • Exchange rates between two countries adjust to inflation differential between countries 21-13 Factors Influencing Exchange Rates (cont’d) • Interest rates • Short-term capital movements from low-yield to high-yield markets • Interest-rate-parity theory • Interplay between interest rate differentials and exchange rates • Interest rates and exchange rates adjust until foreign exchange market and money market reach equilibrium • Balance of payments • Government accounts system that catalogues flow of economic transactions between residents of one country and others • Trade surplus or deficit determines strength of currency 21-14 Factors Influencing Exchange Rates (cont’d) • Government policies • Direct or indirect intervention in foreign exchange market • For maintenance of undervalued currency • Currency values set by government decree • Restriction on inflow and outflow of funds • Monetary and fiscal policies • Result in inflation and change in currency value • Expansionary monetary policies • Excessive government spending 21-15 Other Factors Influencing Exchange Rates (cont’d) • Other factors • Extended stock market rally • Higher capital inflow and currency value increase • Significant drop in demand for nation’s principal exports globally • Lower investment potential and decrease in currency value • Political turmoil in country • Capital shift to more stable countries and decrease in currency value • Widespread labor strikes 21-16 Spot Rates and Forward Rates • Spot rate • Exchange rate at which currency traded for immediate delivery • Forward rates • Trading currencies for future delivery • Expectations regarding future currency value • Discount or premium • Expressed as annualized percentage deviation from spot rate 21-17 Cross Rates • Not all currencies actively traded • Value for such currencies determined through cross rate • Three currencies $, € and ¥ • $ and € actively traded • $ is 0.8384€; € is 141.390¥ • $ = 0.8384 × 141.390¥ = 118.541¥ 21-18 Key Currency Cross Rates 21-19 Key Currency Cross Rates (cont’d) 21-20 Managing Foreign Exchange Risk • Foreign exchange risk • Possibility of revenue drop or cost increase in international transaction due to changes in foreign exchange rates • Shift from fixed-exchange-rate regime to freely-floating-rate regime • Exchange risk of multinational company • Accounting or translation exposure • Transaction exposure 21-21 Translation Exposure • Consolidated figures of parent include value of foreign assets and liabilities converted, expressed in home currency • Changing exchange rates result in losses and gains on translation • Treatment of gains and losses depends on accounting rules established by government of parent company 21-22 Translation Exposure (cont’d) • SFAS 52 says • All foreign currency-denominated assets and liabilities converted at rate of exchange on date of balance sheet preparation • Unrealized gain or loss held in equity reserve account and realized gain or loss incorporated in parent company’s consolidated income statement 21-23 Transaction Exposure • Foreign exchange gains or losses resulting from international transactions (from time of agreement to time of payment) • Volatility of reported earnings per share increases • Strategies to minimize transaction exposure • Forward exchange market hedge • Money market hedge • Currency futures market hedge 21-24 Other Forms of Protection Against Foreign Exchange Risk • Multinational Corporations have developed foreign asset-management programs • Switch cash and other assets into strong currencies • Pile debt and other liabilities in depreciating currencies • Quick collection of bills in weak currencies by offering sizable discounts, while extending liberal credit in strong currencies 21-25 Foreign Investment Decisions • Factors encouraging foreign affiliates • Avoid imposition of trade barriers • Lower production costs overseas • American technology enables easy access to resources in developing countries • Tax advantage • Motivated by strategic considerations in oligopolistic industry • Diversification of risks internationally 21-26 Risk Reduction from International Diversification 21-27 Political Risk in Foreign Investment • Government interference by imposition of unfriendly foreign exchange restrictions • Limitation of foreign ownership to small percentage • Blocking repatriation of subsidiary’s profit to parent firm • Expropriation of foreign subsidiary’s assets by host government 21-28 Guarding Against Political Risk • Establish joint venture with local entrepreneur • Establish joint venture with firms from other countries • Insurance against perceived political-risk level can be obtained • Overseas Private Investment Corporation (OPIC), other private insurance companies sell insurance policies • Coverage expensive in troubled countries 21-29 Financing International Business Operations • Credit sales influenced by • Relationship of parties involved • Political stability of countries involved • Letter of credit issued by importer’s bank reduces nonpayment risk • Exporter’s credit risk absorbed by importer’s bank • Importer’s bank in good position to evaluate importing firm’s creditworthiness 21-30 Financing International Business Operations (cont’d) • Alternatives to avoid risk of loss of business • Obtaining export credit insurance • Foreign Credit Insurance Association (FCIA) provides this kind of insurance • Private association of 60 U.S. insurance firms 21-31 Funding of Transactions • Eximbank (Export-Import Bank) • Direct loan program • Discount program • Loans from parent company or sister affiliate • Parallel loans • Fronting loans • Eurodollar loans • US dollars deposited in foreign banks • Lending rates based on London Interbank Offer Rate (LIBOR) 21-32 Funding of Transactions (cont’d) • Eurobond market • Issues sold in several national capital markets • Widely used currency – U.S. dollar • International equity markets • Companies listed on major stock exchanges • Issue American Depository Receipts (ADRs) • International Finance Corporation (IFC) • Approached by companies facing issues with raising equity capital in foreign country 21-33 Some Unsettled Issues in International Finance • Financial decisions for multinational corporation are complex • Access to more sources of financing than purely domestic corporation • Decision regarding level of leverage in foreign affiliate • Dividend policy decisions influenced by foreign government regulations • Differences in interest rates and market conditions between domestic and foreign markets • Differences in corporate financial practices 21-34
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Risks and Benefits in U.S. Multinational Organizations Multiple Listing outline


Outline



Risks in the US multinational Organizations multiple listing.
o Different countries have different policies and regulations as in the case of
taxation.



Benefits of US multinational Organizations multiple listing.
o Various countries have different valuation that can cushion the organization
from economic hiccups.



Conclusion


Running head: US MULTINATIONAL ORGANIZATIONS MULTIPLE LISTING

Risks and Benefits in U.S. Multinational Organ...


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