Accounting
balance sheets, 55–57
FASB, 53–54
income statements, 57
methods, 183–184
pooling-of-interest method, 53
purchase method, 54–57
Acquisitions
Chinese acquisitions. see Chinese cross-border mergers and acquisitions
definition, 10
domestic acquisitions, 80,
American option, 82
Antinatural logarithm, 100
Approximation method. See Normal distribution function
Australian policy
Chinalco-Rio transaction, 203
Chinese acquisitions, 186
Chinese direct investments, 201–202
FIRB, 202
foreign direct investment, 201, 204–205
investors and officials, 204
reviews, 202
SOEs, 180–182, 187, 203
Sovereign Wealth Funds (SWFs), 202
Sydney Morning Herald, 203–204
Treasury’s opinion, 203
Black-Scholes model
analytical solutions, 92
normal distribution, 94–95
numerical methods, 92
option formulas, 92–93
option value, 102–104
real option analysis, 88–89
real option valuation. see Real option valuation
standard normal distribution, 92–93
stochastic differential equation, 91–92
valuation challenges, 110–113
volatility estimation, 96–102
Business valuation. See Company valuation
Call option, 81–83
Capital asset pricing model (CAPM)
concept and application, 72
regression line, 72–73
Cash flow calculation. See Multiple currencies
CDO. See Corporate development office (CDO)
Centralization vs. decentralization, 142
CFIUS. See Committee on Foreign Investment in the United States (CFIUS)
China’s outbound foreign direct investment. See Outbound foreign direct investment (OFDI)
Chinese cross-border mergers and acquisitions
accounting method, 183–184
in Australia, 50–52, 186
Chinese outbound direct investment. see Outbound direct investment
and due diligence, 185–186
government regulations, 182–183
in Italy, 186–188
OFDI. see Outbound foreign direct investment (OFDI)
overseas acquisition. see Overseas acquisition (Chinese enterprises)
overseas investment performances, 185
overview, 175
postmerger integration processes, 184
Shuanghui International Holding Ltd. see Shuanghui International Holding Ltd.
SOEs. see State-owned enterprises (SOEs)
in United States, 44–49, 132–134, 189–193
CITIC group and investment
Australian nationalism, 51
Chinese investment, 51
due diligence and Chinese acquisitions, 185–186
financial services, 50
labor issues, 50–51
Clayton Act of 1914, 199–200
Committee on Foreign Investment in the United States (CFIUS)
attitude to Chinese acquisitions, 196
committee reports, 195
Defence Production Act of 1950 (DPA), 44–46
foreign controls, 197–198
foreign enterprises, 194–195
postmerger class action lawsuits, 200–201
regulatory consideration, 132–134
securities laws and acquisitions, 198–199
U.S.Intelligence Community (USIC), 196
Company valuation
Black-Scholes model. see Black-Scholes model
comparable companies’ approach, 60–61
comparable transactions method, 60–62
in cross-border mergers, 115–126
DCF spreadsheet approach, 62–65, 79–80
exchange rates and risk exposures, 115–128
formula approach, 65–68
incremental profit approach, 68–70
real option analysis. see Real option analysis
Comparable companies approach
adjusted values, 60–61
ratios, 60
variables, 60
Comparable transactions method
adjusted values, 62
ratios, 61
Confirmatory due diligence, 43
Conglomerate mergers, 16
Consolidation, definition, 10
Corporate development office (CDO), 31–32
Corporate restructuring
conglomerate mergers, 16
definition, 11
distribution risks, 15
diversification, 13
domestic M&As vs. cross-border M&As, 17–18
financial restructuring, 9
financial synergy, 12
foreign exchange and repatriation risks, 15
horizontal mergers, 16
investor buyer, 17
legal risks, 14–15
management risks, 14
mismanagement/agency problem, 13
operating synergy, 12
operational restructuring, 9–10
operator buyer, 17
political risks, 15–16
statutory and subsidiary mergers, 10
taxation risks, 15
terminologies, 10–12
vertical mergers, 16
Cost of capital
debt, 73–74
equity, 71–73
fund raising, 74–75
weighted average, 75–77
Cross-border M&A
Chinese M & A issues. see Chinese cross-border mergers and acquisitions
and domestic M&As, 17–18
FDI, 12
risk association, 14
Cross-border valuation, 124–126
Culture, definition, 28
Currency transactions
appreciation and depreciation, 120–121
forward contracts, 121–122
nominal exchange rate. see Nominal exchange rate
spot transaction, 121–122
swap transaction, 121–123
value date, 121
DCF spreadsheet approach
capital budgeting, 62
free cash flows (FCFs), 62–64
projected values , 64–65
valuation, 65
Deal structuring
definition, 22
initial deal structuring, 130–131
Discrete time framework, 97
Discounted cash flow (DCF) analysis
company valuation. see Company valuation
spreadsheet approach. see DCF spreadsheet approach
Diversification, 13
Divestitures, 11
Domestic M&A
and cross-border M&A, 17–18
motives for acquisition, 168
Societa Metallurgica Italiana (SMI) and Delta, 80
Due diligence
Chinese acquisitions, 185–186
cultural, 48–49
definition, 22
financial, 43
full diligence, 42–43
issues faced, 42
legal, 43
market, 48
negotiations, 130
objectives, 41
personnel, 48
preliminary information list, 42
stages, 42–43
technical, 48
Economic exposure, 128
Effective communication mechanism, 140
Equity carve-out transactions, 11
European option, 82
Exchange rate
cash flow calculation, 126–127
cross-border valuation, 124–126
definition of, 116
quotation, 115–116
fluctuations, 120–121
foreign exchange rate, 15
forward, spot, and swap rates, 121–124
nominal and real, 115–118
purchasing power, 118–120
risk exposure, 127–128
Expected cash flow and investment value
delayed investment, 86–88
stages in investment, 88–89
FASB. See Financial Accounting Standards Board (FASB)
FDI. See Foreign direct investment (FDI)
Federal Trade Commission (FTC), 199
Financial Accounting Standards Board (FASB), 53–54
Financial assessment, 40–41
Financial restructuring, 9
Financial time series, 96–100
Financing plan, 131–132
Foreign direct investment (FDI), 12, 163
Foreign exchange
economic exposure, 128
transaction exposure, 127
translational companies, 128
Foreign Investment Review Board (FIRB), 202–204
Formula approach
basic formula, 66
constant cash flow growth, 66
no-growth and constant growth, 67
temporary supernormal growth, 66
Forward contracts currency transactions, 121–122
Free cash flows (FCFs), 62–64
FTC. See Federal Trade Commission (FTC)
GDP. See Gross domestic product (GDP)
Geographic distribution, 167–168
Global enterprises, 5
Global Resources International (GRI), 109–110
Greenfield investment, 12
GRI. See Global Resources International (GRI)
Gross domestic product (GDP), 3–4
Herfindahl-Hirschman Index (HHI), 35–36, 199–200
HHI. See Herfindahl–Hirschman Index (HHI)
Horizontal mergers, 16
Human resource (HR) management. See Staffing plan
ICT. See Information and communication technology
Incremental profit approach, NPV calculation, 68–70
Industry roll-up, 11
Information and communication technology (ICT)
absorption, 147
components of, 146
definition, 6–7
integration methods, 147–148
nonstorability and intangibility, 7–8
strategy for, 147–148
symbiosis strategy, 147
Initial deal structuring. See Deal structuring
Integrating functions and departments
finance and administration, 144–145
human resources, 145–146
ICT, 146–148
IP rights management and control, 156–157
level/degree of integration, 152–155
planning and strategy, 144
postacquisition processes and internal controls, 155–156
SCM, 148–152
Integration
approaches, 139
definition, 139
effective communication mechanism, 140
of functions and departments, 144–157
level of. see Level/degree of integration
organization structure, 140–143
premerger integration plan, 139–140
staffing plan, 143–144
Integration phase and problems, 22, 25
Intellectual property (IP), 156–157
Internationalization, economic system
communication and transportation, 6–8
financial markets, 4
international transfer of technology, 4
labor market, 6
national enterprises, 5
product and service markets, 3–4
International transfer of technology, 4
IP. See Intellectual property
Italy (Chinese acquisitions), 186–188
Labor Conflict in Postmerger integration, 158
Lenovo and IBM’s PC division, 189–193
Level/degree of integration
actions, 153–154
capital expenditure, 154
corporate culture, 154–155
motives for, 152
operating expense, 154
revenue, 154
SC integration, 152–154
working capital, 154
Leveraged buyouts, 11
Leveraged recapitalization, 12
Managerial and sociocultural integration, 138
Merger and acquisition (M&A) integration, 135
Merging process
acquisition/execution, 21–22
statutory and subsidiary mergers, 10
inspection problems, 22–24
integration phase and problems, 22, 25
negotiation problems, 24–25
screening, 21
strategic/long-term planning, 19–21
Ministry of Commerce (MOFCOM), 178, 182–183
MOFCOM. See Ministry of Commerce
Monte Carlo simulation method, 104
Multidomestic enterprises, 5
Multiple currencies, 126–127
National Development and Reform Commission (NDRC), 176–178
National Petroleum Exploration Company (NPEC), 109–110
NDRC. See National Development and Reform Commission (NDRC)
Negotiations
definition, 22
financing plan, 131–132
hostile tender offer/hostile takeover, 129–130
problems, 24–25
refining valuation, 130
strategies, 129–130
tender offer, 129
Net present value (NPV), 102–104
calculation, incremental profit approach, 68–70
formula, 102
Monte Carlo simulation method, 104
NPV method, 103
real option method, 103–104
Nominal exchange rate, 115–116
Normal distribution function, 94–95
NPEC. See National Petroleum Exploration Company (NPEC)
NPV. See Net present value (NPV)
ODI. See Overseas direct investments (ODI)
OFC. See Offshore financial centers (OFC)
OFDI. See Outbound foreign direct investment (OFDI)
Offshore financial centers (OFC), 164
Organization structure, Integration
centralization vs. decentralization, 142
departmentalization, 142–143
organizational model, 143
planning, 140
principles of, 141–142
span of control, 142
tall vs. flat organization structures, 142
Operational restructuring
definition, 9
statutory and subsidiary mergers, 10
Option premium, 82
Option terminologies, 80–82
Option value. See Net present value (NPV)
Outbound direct investment
Australian policy, 201–205
CFIUS, 194–198
Clayton Act of 1914, 199–200
policies of, 193
postmerger class action lawsuits, 200–201
U.S. Securities Laws and Acquisition, 198–199
United States, 193–194
Outbound foreign direct investment (OFDI)
continents, 164–165
external constraints, 173
foreign direct investment, 163
global distribution, 163–164
OFC, 164, 166
outbound merger and acquisition. see Outbound merger and acquisition
overseas direct investments, 163
state-owned enterprises, 166
Outbound merger and acquisition
activities, 171–172
factors contribiting, 168–170
geographic distribution, 167–168
role of Government and information, 170–171
sectoral focus, 168
Overseas acquisition (Chinese enterprises)
agencies, 175–176
MOFCOM, 178
NDRC, 176–178
SAFE, 178
SOEs and SASAC, 176
state council, 176
Overseas direct investments (ODI), 163
PCAOB. See Public Company Accounting Oversight Board (PCAOB)
People’s Republic of China’s (PRC), 176
Physical integration, 137
Pooling-of-interest method, 53
Postacquisition processes and internal controls, 155–156
Postclosing organization, 131
Postclosing real option, 86
Postmerger Class Action Lawsuits, 200–201
Postmerger integration and reorganization
acquisition practices, 157–158
acquisition visions, 137
business entities, 135
case study, 158
culture characteristics, 136
integration. see Integration
managerial and sociocultural integration, 138
organizational tasks, 136
physical integration, 137
political characteristics, 137
procedural integration, 137
risk factors, 138–139
statistics, 138
task characteristics, 136
PRC. See People’s Republic of China’s (PRC)
Preclosing real option, 86
Premerger integration plan, 139–140
Procedural integration, 137
PPP. See Purchasing power parity (PPP)
Purchase method
assumptions for calculations, 57
balance sheets, 55
postmerger balance sheet, 56
price paid and net asset value, 54
Public Company Accounting Oversight Board (PCAOB), 198–199
Purchasing power parity (PPP), 119–120
Put option
European, 83
in-the-money, 84
out-of-money, 84–85
Qianjiang Motors and Benelli Motorcycles, 186–188
Ralls Corporation and Terna Corporation
CFIUS, 44–46
cultural due diligence, 48–49
DPA, 44
legal problems, 45
market due diligence, 48
personnel due diligence, 48
technical due diligence, 48
Real exchange rate, 116–118
Real option analysis
American, 82
call option, 82–83
European, 82
expected cash flow and investment value, 86–89
financial options, 85
holder/writer, 81–82
in-the-money, 81
option, definition, 80
option premium, 82
out-of-money, 81
preclosing real option, 86
put options, 83–85
real options, 85
risks, 85
SMI company, 80
transactions, call and put option, 81
Real option valuation
to abandon, 108–110
to delay investment, 106–108
to expand valution, 104–106
Regulatory agencies, 129
Regulatory considerations
case study, 132–134
CFIUS, 132
SAFE. See State Administration of Foreign Exchange (SAFE)
SASAC. See State-owned Assets Supervision and Administration Commission of the State Council (SASAC)
SCM. See Supply Chain Management (SCM) Integration
Screening process, target company
criteria, 38–39
developing profiles, 38
prioritizing/ranking, 39
SEC Act of 1934. See Securities and Exchange Commission
Securities and Exchange Commission (SEC) Act of 1934, 198–199
Services, definition, 7
Shuanghui International Holding Ltd., 132–134
Societa Metallurgica Italiana (SMI) company, 80
SOEs. See State-owned enterprises (SOEs)
Special purpose vehicles (SPVs), 178, 182
Spin-off transactions, 11
Split-up transactions, 11
Spot currency transaction, 121–122
SPVs. See Special purpose vehicles (SPVs)
Staffing plan, 143–144
State Administration of Foreign Exchange (SAFE), 178
State-owned Assets Supervision and Administration Commission of the State Council (SASAC), 176
State-owned enterprises (SOEs), 166, 176
approval and filing requirements, 180–181
due diligence, 181
financing, 181
national and provincial governments, 179
organizational flowchart, 179–180
overseas investment performances, 185
registration and monitoring, 182
rules, 179–180
SASACs, 179
SPVs, 182
valuation, 181
Statutory merger, 10
Strategies, 129–130
Strategic/long-term planning
approaches, firm growth, 19–20
“Dual class stock”, 21
goal of, 19–21
Strategy development
challenges, 33–34
choosing objectives, 29–30
CDO, 31–32
culture, definition, 28
lead advisers, 32–33
M&A strategy development, 30
terminologies, 27–28
Stochastic differential equation, 91
Subsidiary merger, 10
Supply Chain Management (SCM) Integration
bolt-on strategy, 151–152
consolidation strategy, 152
definitions, 148–149
history, 149
optimal SC and corporate performance, 149–152
SC professionals, 150–151
transformative integration strategy, 151
tuck-in strategy, 152
Swap currency transaction, 121–123
Takeovers/buyouts, 11
Tall vs. flat organization structures, 142
Target company
acquisition candidate pool, 37
barrier to entry, identification, 37
CITIC Pacific, 50–52
due diligence, 41–43
financial assessment, 39–41
identification and understanding, 35–36
market size and growth potential, 36
screening process, 38–39
technological changes and trends, 36–37
Terna Corporation, 44–49
Target valuation
cross-border valuation, 124–126
exchange rate fluctuations, 120–121
foreign exchange, 127–128
law of one price and purchasing power, 118–120
multiple currencies, 126–127
nominal exchange rate. see Nominal exchange rate
real exchange rate, 116–118
relationship between spot and forward rate, 124
spot, forward, and swap currency transactions, 121–123
Tender offers, definition, 10–11
Time variability, 96–100
Transaction exposure, 127
Translation exposure, 128
United States (Chinese acquisitions)
Lenovo and IBM’s PC division, 189–193
Shuanghui International Holding Ltd., 132–134
Terna Corporation, 44–49
Valuation
assessing regulatory and market risk, 111
Black-Scholes model. see Black-Scholes model
contingent liabilities, 112
collection of debt, 111
definition, 22
financial instruments, 113
hidden costs, 112
inadequate attention, 112
intangible assets, 112–113
inventories and receivables, 111–112
questionable capitalization, 111
unreliable historical financial data, 111
Vertical mergers, 16
Volatility estimation
daily stock prices, 101
financial time series. see Financial time series
rate of return, 96
stock and standard deviation, 96
trading calendar days, 100–102
Weighted average, 75–77