An empirical analysis of factors affecting cross-border acquisitions: U.S.-Japan.
One of the prominent aspects of the debate concerning American competitiveness in world markets is the marked increase in cross-border mergers and acquisitions involving American firms. Heigthened awareness occurs when a Japanese company is the acquirer, especially if very large sums are involved. The purpose of this research is to examine these cross-border mergers and acquisitions involving American and Japanese firms, particularly in the last decade.
Several factors make the U.S. markets attractive to Japanese investors. For instance, the size of the American economy, the largest in the world, implies vast consumer markets. In a discussion of motives for Japanese foreign direct investment, Chernotsky singles out "the size, importance and accessibility of the U.S. market" as one of the major "pull" factors attracting Japanese investment.(2) Yet size alone cannot explain this extraordinary attraction of U.S. markets for foreign investors. After all, there are other large economies and consumer markets.
Fears of a surge in protectionism in the United States has become another common theme in the debate concerning foreign direct investment. The case of the establishment of subsidiaries of major Japanese automobilie manufacturers in the U.S. during the 1980s is a visible example of a strategy designed to fend off protectionist threats. In addition, for foreign investors as a whole, the political stability offered by the U.S. marketplace, evidenced by a generally benign set of rules and regulations concerning foreign businesses, is a factor of attraction which ranks second only to the sheer size of the U.S. economy. The United States has consistently enjoyed a very hospitable climate for foreign investment. Indeed, Yoshida (1987) reports that "to look for the political stability" is one of the main reasons for Japanese manufacturing investment in the United States; not only that, "special tax incentives" and "other state and local government incentives" rank among the most important factors influencing location decisions within the United States.(3)
In sum, the attractiveness of the large U.S. markets, the traditionally liberal U.S. business environment and pervasive fears of a rising tide of protectionism have figured predominantly as issues to be carefully considered by current and prospective foreign investors, especially by companies contemplating a merger or acquisition of a U.S. concern. There are, however, other major factors in this complex decision, which have received increased attention. They relate to corporate restructuring, technology transfers, corporate culture, and the investment horizon.(4)
This general rationale for the attractiveness of the United States for cross-border mergers and acquisitions by Japanese businesses is only part of the picture. It seems important to identify certain variables that affected the flows of U.S.-Japan acquisitions during the 1980s. Accordingly, in the next section, we discuss macroeconomic variables that may apply to any cross-border activity, but are particularly relevant to the U.S.-Japan case. This is followed, by our empirical analysis which contains our statistical models, a description of the data and our results. Finally, the implications of our results -- that the drive for cross-border acquisitions is explained both by macroeconomic as well as by industry and firmspecific variables -- are summarized in the last section.
Cross-Border Mergers and Acquisitions: Developments in the 1980s and their Rationale
Since the end of the 1981-1982 recession in the United States, there has been a marked increase in domestic and cross-border merger and acquisition activity. This cross-border acquisition wave receded only with the onset of recession in the U.S. and the U.K. during the late 1980s and early 1990s, the dislocations imposed by the German reunification and more recently with the marked slowdown of the Japanese economy.
Moreover, the composition of cross-border acquisition activity has shifted abruptly over the same period. For example, U.S. acquisitions of non-U.S. firms increased modestly from 149 in 1983 to 177 in 1987, while foreign acquisitions of U.S. firms rose substantially. In 1983, there were 116 foreign acquisitions of U.S. firms, valued at about $22 billion; this increased to 363 foreign acquisitions of U.S. firms in 1987, with an approximate value of $42 billion. To put it another way, U.S. firms acted as acquiring firms in about 56 percent of the cross-border acquisitions involving U.S. firms in 1983, versus only about 26 percent in 1987. In some of the more publicized foreign acquisitions of U.S. firms, a Japanese company acted as the acquiring firm, including Sony's acquisition of CBS Records Group and Bridgestone's acquisition of Firestone Tire & Rubber Co.
It seems important to examine the variables that a company considers when contemplating a cross-border acquisition or merger. The extant literature lacks a framework within which different cases of cross-border mergers and acquisitions can be analyzed. In this section we consider the positive as well as the unfavorable factors affecting cross-border mergers and acquisitions, with a focus on the U.S.-Japan recent experience. In addition, using a capital budgeting framework, we illustrate how the feasibility of a proposed foreign acquisition can be measured. This framework is then applied to explain the recent trends of increasing acquisitions of U.S. firms by foreign firms and reduced acquisitions of non-U.S. firms by U.S. firms. In the following section, we proceed to examine the empirical evidence on cross-border acquisitions between firms in the United States and Japan during the 1980s.
Factors Affecting Cross-Border Acquisitions and Mergers
A diverse, and sometimes conflicting collection of factors affecting cross-border acquisitions is found scattered throughout the literature in this area. What follows is a summary of these factors, keeping in mind the objectives of this study.(5)
Favorable merger factors
Factors that encourage cross-border acquisitions and mergers are those that offer the acquiring firm an advantage that is not available within its home market. Some of the most prominent relate to exchange rates, diversification, market conditions, and technology.
a. Exchange rates: According to much of the literature, exchange rates play a major role in the decision-making process concerning a foreign acquisition. If the U.S. dollar is strong with respect to foreign currencies, we should see an upward trend in the acquisitions of foreign firms by U.S. firms and a downward trend in the acquisitions of American firms by foreign firms. The opposite should hold in periods where the dollar weakens against major foreign currencies.
However, there is an opposite argument with respect to the importance of the value of the dollar at the time of the acquisition. As the dollar strengthens, the future profits to be remitted from the prospective subsidiary will have a lower discounted value when measured in dollars. Thus, the direction of the exchange rate effect is not as clear-cut as the previous view implies and becomes ultimately an empirical question.
b. Diversification: Given a firm's preferred risk-return position, international diversification by the way of acquisitions or mergers improves the tradeoff, because the covariance of returns across economies, even within the same industry, is likely to be smaller than within a single economy. The prospective acquiring company must first decide on its desired levels of risk and return. Only then should it attempt to identify countries, industries, and specific firms which fall within this "risk class".
c. Current economic conditions in the home country: Adverse economic conditions in the home country, such as a slump, recession, or capital constraint, may cause firms to concentrate on their domestic business while temporarily delaying strategic international moves. Once the economy rebounds, cross-border acquisitions are likely to become again a means for increasing demand and diversification.
d. Acquisition of modern technology: There are cases in which the firms fall behind the level of technological knowledge necessary to compete efficiently in the industry in the domestic and/or international market. If a firm is unable or unwilling to develop the required technology through research and development, it may try to acquire foreign firms which are technologically more advanced. Such an acquisition allows the firm a foothold in the foreign country's market, and it may transfer the acquired technological advantages back home, in order to strengthen its position in the domestic market.
Unfavorable merger factors
These are factors which seem to restrain the cross-border merger movement. They include information effects, inefficiencies, monopolistic power, and regulations.
a. Availability of information: Information about a prospective target firm is crucial in the decision-making process of the acquiring firm. For example, areas in which timely and accurate information is necessary include current market share figures, comparisons with the competition, current sales, cash flow forecasts, and company-specific strengths and weaknesses. Yet foreign firms may not disclose these and other relevant figures. If the necessary information to make an accurate analysis is not available, the prospective acquiring firm may be forced to delay or discontinue its plans, even though the foreign firm appears to be a very attractive target on the surface. Otherwise, failure to come up with an accurate analysis may prove to be devastating for the acquiring firm.
However, information effects are not always harmful. Arguments based upon asymmetry of information claim that the acquirer is able to obtain information not available to other market participants.
b. Inefficiencies: Inefficiency arguments center on the acquiring firm being able to replace incompetent or inefficient management within the acquired firm in order to better utilize the acquired firm's assets. The hope is that new management will be able to increase the efficiency of the acquired firm and thus generate a higher rate of return. A drawback of this action is the cost of replacing the inefficient management. The negative aspects of the inefficiencies argument apply to the resistance that may materialize from the foreign managers who are left in place after the shake-up, which takes the form of negative attitudes directed to the outsiders taking over the firm.
c. Monopolistic power: Synergy arguments in defense of domestic or cross-border acquisitions are based upon the economies of scale supposedly derived from horizontal mergers, economies of scope associated with vertical mergers, or the gains from acquiring monopolistic power. However, if monopolistic power is attained by one firm (a difficult proposition in the U.S., due to the threat of antitrust action), then entry in the industry becomes much more difficult for any competitor, domestic or foreign. In addition, a monopolist is much more likely to resist a foreign takeover. Among the entry barriers that will make a cross-border acquisition difficult (or even "de novo" entry, for that matter) one finds product differentiation, which is tied to huge advertising expenditures and R&D outlays, and the capital expenditures necessary to establish a plant of minimally efficient size.
d. Government restrictions and/or regulations: Most governments have some form of takeover regulation in place. In many instances, government approval is mandatory before acquisition by foreign businesses can take place. In addition, government restrictions may exist on capital repatriations, dividend payouts, intracompany interest payments, and other remittances. These restrictions seem to be more prevalent in less developed countries.
Moreover, international transactions may raise antitrust issues. Mergers with foreign firms certainly belong to this category, but so do distributorship contracts, patent and trademark licenses, overseas distribution arrangements, raw material procurement agreements and concessions, and overseas joint ventures for manufacturing, research, and distribution. Antitrust considerations, then, will probably have some bearing on a firm's decision to merge with or acquire a foreign firm, to the extent that uncertainty about the foreign government's reaction to cross-border acquisitions may cause some companies to limit or discontinue their acquisition plans.
Relevant Variables in Cross-Border Mergers and Acquisitions Involving U.S. Firms(6)
Because firms vary by industry, risk, size, and international expertise, their interest in foreign acquisitions varies. Our previous discussion implies that some macroeconomic variables (e.g., the exchange rate) may be used to explain general foreign acquisition trends involving firms of a particular country, whereas other industry or firm-specific variables help to explain whether cross-border mergers and acquisitions are more common for certain industries, or for firms with particular characteristics.
In the particular case of cross-border mergers and acquisitions involving U.S. firms, several relevant microeconomic variables can be identified. The initial outlay necessary for non-U.S. firms to acquire a U.S. business was relatively lower during the 1985-1989 period because of a downward trend of the foreign exchange value of the dollar since 1985. In addition, while U.S. stock prices have generally increased in recent years (except for the crash of October 1987), U.S. businesses have still been perceived as bargains by non-U.S. firms that can obtain dollars cheaply.
Moreover, the estimated periodic cash flows of a U.S. business from a non-U.S. firm's perspective has been generally high, other things equal, insofar as the economic conditions in the U.S. have been generally very favorable in the period between 1982 and 1989. Finally, the cost of capital for foreign firms appears to have been low in recent years, due to a relatively plentiful supply of equity and borrowed funds, both in the U.S. and in other major industrial countries.
The combined impact of these macro and micro variables was been a flurry of activity in the cross-border mergers and acquisitions arena in the last decade, with U.S. firms finding themselves more frequently in the position of acquirees rather than acquirers. Of particular interest to this study is the foreign merger and acquisition activities between U.S. and Japanese firms. In the next section, we examine the empirical record of this activity, using a statistical model derived from the relevant variables studied above.
Empirical Evidence on Cross-Border Mergers and Acquisitions: U.S.-Japan
Our approach in this section is to introduce a statistical model to assess the impact of the relevant variables identified by the capital budgeting approach to foreign acquisition activity. This model is then applied to foreign acquisitions involving U.S. and Japanese firms over the period 1982-1989.
Table 1 shows the magnitude of the U.S.-Japan cross-border acquisitions on a quarterly basis. We can see that, over the eight-year period investigated in this study, Japanese firms were acting predominantly as acquirers, and that this trend intensified after 1984. Although it is not possible to obtain dollar amounts for the total value of the cross-border mergers and acquisitions, insofar as many transactions go on record with their values undisclosed, it is safe to say that these dollar amounts rose substantially during the last decade, in both nominal and real terms.
Two types of testing were undertaken to analyse the factors affecting the U.S.-Japan cross-border mergers and acquisitions in the 1980s. Logit and ordinary least squares regression were utilized. Both models are concerned with testing the impact of the variables on the likelihood of a cross-border acquisition taking place. The logit model is formally classified as a univariate dichotomous model, since it is concerned only with the trend of the cross-border acquisition (i.e. 0 if the number of Japanese acquisitions of American firms is less than or equal to the number of American acquisitions of Japanese firms and 1 otherwise).
Table 1. U.S.-Japan Cross-Border Mergers and Acquisitions, 1982-1989 (Number of Transactions) Year Quarter Japanese Acquisitions American Acquisitions of U.S. Firms of Japanese Firms 1982 I 2 5 II 1 2 III 3 0 IV 0 0 1983 I 1 0 II 0 0 III 1 2 IV 2 2 1984 I 3 1 II 0 0 III 2 0 IV 4 3 1985 I 7 0 II 1 1 III 2 1 IV 2 0 1986 I 4 1 II 1 0 III 5 1 IV 14 2 1987 I 4 0 II 5 0 III 3 1 IV 7 0 1988 I 7 0 II 12 1 III 14 1 IV 7 1 1989 I 21 2 II 1 0 III 16 1 IV 24 0 Sources: Mergers and Acquisitions, several issues. The total dollar values for acquisitions are generally not available. These values are disclosed for some acquisitions but not for all of them.
The logit model uses the logistic distribution as a probability function. One of the basic benefits of this distribution is that it constrains the dependent variable to lie between 0 and 1. The model coefficients are estimated using the maximum likelihood function. Logistic regression is utilized rather than discriminant analysis since it does not require the assumption of multivariate normality.(7) The only assumption necessary for logit regression is that the probability (p) of a cross-border acquisition taking place with a Japanese company as acquirer equals:
p = 1/(1 + exp (- BX))
where B denotes the vector of regression parameters and X is the vector of explanatory variables.
Both the Logit and the OLS regression models, which evolved from the capital budgeting framework developed in the previous section, were specified as:
|ACQ.sub.t~ = f(|EXRATE.sub.t-n~, |BYDIF.sub.t-n~, |STKUS.sub.t-n~, |STKJ.sub.t-n~) + |e.sub.t~ (1)
ACQ = acquisition differences (Logit regression - binary variable where ACQ = 0 when the number of Japanese acquisitions of American firms is less than or equal to the number of American acquisition of Japanese firms and ACQ = 1 otherwise; OLS regression -- actual cardinal difference between the number of Japanese acquisitions of American firms and the number of American acquisition of Japanese firms);
EXRATE = the exchange rate, measured in Y/$;
BYDIF = bond yield differential between comparable debt securities in the U.S. and Japan;
STKUS = stock market index in U.S.;
STKJ = stock market index in Japan.
The corresponding statistical model was hypothesized for both the logit and OLS regressions as follows:
|ACQ.sub.t~ = |b.sub.0~ + |b.sub.1~ |EXRATE.sub.t-n~ + |b.sub.2~ |BYDIF.sub.t-n~ + |b.sub.3~ |STKUS.sub.t-n~ + |b.sub.4~ |STKJ.sub.t-n~ + |e.sub.t~ (2)
where n = 0 for the contemporaneous model and n = 1, 2 or 3 for the lagged models below. The error process was assumed to be e |is similar to~ N (0, ||Sigma~.sup.2~ |I.sub.T~). In line with these assumptions, the proposed empirical relationships were estimated by both logit and ordinary least squares (OLS) regressions. A more detailed description of the data is provided below.
All variables were measured on a monthly basis, from January of 1982 through December of 1989. This period encompasses most of the economic expansion of the 1980s, which was the longest on record in peacetime. Therefore, it was a period of growth in both the U.S. and Japan. In addition, this time frame for the analysis encompasses both a cycle when the U.S. dollar appreciated against major foreign currencies (January 1982-Spring 1985) and the subsequent cycle of depreciation of the U.S. dollar (Spring 1985-December 1989).
Data for the dependent variable (ACQ) were obtained from Mergers and Acquisitions, several issues. These data were obtained separately for Japanese acquisitions of U.S. firms (AJ) and U.S. acquisitions of Japanese firms (AU). Then, the latter figures were subtracted from the former. Data for the exchange rate variable (EXRATE) were compiled from the IMF's International Financial Statistics. Again, we obtained separate series for the Y/SDR exchange rate (EJ) and the $/SDR exchange rate (EU). The series for the variable EXRATE results from dividing the former by the latter.
By the same token, the series for the bond yield differential variable (BYDIF) results from subtracting Japanese bond yields (BJ) from the U.S. bond yields (BU). These yields where obtained from World Financial Markets, published by Morgan Guaranty Trust Co. The stock prices for the U.S. (STKUS) are the monthly averages of the S&P 500 Composite, published by S&P's Security Price Index Record. Finally, the stock prices for Japan (STKJ) are monthly averages of the Tokyo Stock Exchange Index, published in the Moody's International Manual. The results of our empirical analysis are presented next.
Table 2 presents some descriptive statistics: the mean, standard deviation, and minimum and maximum values for the dependent and independent variables. A positive integer value for ACQ means that the number of Japanese acquisitions of U.S. firms exceeded the number of U.S. acquisitions of Japanese firms in a given month. The mean value (1.3) for the ACQ variable suggests that Japanese acquisitions of U.S. firms exceeded American acquisitions of Japanese firms on average. For comparable debt securities, U.S. annualized yields exceeded Japanese yields by 4.79% (479 basis points) on average during the period 1982-1989. The remainder of Table 2 lends itself to similar interpretations.
The main results of our empirical analysis are presented in Tables 3 (logit) and 4 (OLS). The statistical model (2) was estimated with contemporaneous variables.(8) In addition, three lagged models were estimated for both the logit and the OLS regressions. The explanatory variables were lagged one, two, and three months respectively as follows:
|ACQ.sub.t~ = |b.sub.0~ + |b.sub.1~ |EXRATE.sub.t-1~ + |b.sub.2~ |BYDIF.sub.t-1~ + |b.sub.3~ |STKUS.sub.t-1~ + |b.sub.4~ |STKJ.sub.t-1~ + |e.sub.t~ (2a)
|ACQ.sub.t~ = |b.sub.0~ + |b.sub.1~ |EXRATE.sub.t-2~ + |b.sub.2~ |BYDIF.sub.t-2~ + |b.sub.3~ |STKUS.sub.t-2~ + |b.sub.4~ |STKJ.sub.t-2~ + |e.sub.t~ (2b)
|ACQ.sub.t~ = |b.sub.0~ + |b.sub.1~ |EXRATE.sub.t-3~ + |b.sub.2~ |BYDIF.sub.t-3~ + |b.sub.3~ |STKUS.sub.t-3~ + |b.sub.4~ |STKJ.sub.t-3~ + |e.sub.t~ (2c)
Table 2. Descriptive Statistics Variable Mean STD DEV Minimum Maximum AJ 1.598 1.989 0 10 AU 0.293 0.638 0 4 ACQ 1.304 2.010 -3 9 EU 1.160 0.126 0.959 1.419 EJ 219.562 37.992 166.360 294.600 Exrate 194.448 50.778 121.751 277.297 BU 11.085 2.028 7.920 15.750 BJ 6.296 1.039 4.620 8.100 BYDIF 4.789 1.320 2.520 8.040 STKUS 211.826 64.485 109.400 346.619 STKJ 1,315.315 675.770 523.300 2,631.400 Note: Number of monthly observations n = 92 (January 1982 to December 1989)
TABULAR DATA OMITTED
TABULAR DATA OMITTED
Table 3 presents the results for the logit model (2), with contemporaneous variables. This table (and subsequent Tables 5 - 7) show the parameter estimates of the model, as well as tests of significance for the explanatory variables, the Wald chi square test for goodness of fit, selected criteria for assessing model fit, and a classification table.
The results in Table 3 suggest that, although the model as a whole performs quite well, as indicated within the criteria section of the table, only the stock prices in Japan are significant at the 10% level or better. The signs of the coefficients are as expected: The higher the stock prices in Japan and the lower the stock prices in the U.S., the more favorable are the conditions for Japanese firms to acquire U.S. firms (the converse statement also holds). By the same token, the larger the bond yield differential, that is, the higher interest rates are TABULAR DATA OMITTED in the U.S. compared to Japan's, the less favorable it is to Japanese companies to acquire U.S. firms. The reason is that debt financing for such an acquisition is obtained in the U.S. markets, by and large; also, much lower costs of debt at home encourages Japanese companies to reinvest domestically. This domestic investment is an alternative to foreign acquisitions. The exchange rate variable (EXRATE) is not significant. This somewhat surprising result may be explained by the presence of multicollinearity. For our purposes, however, it is important to notice that the combined impact of the exchange rate, cost of debt (i.e., bond yields) and equity prices explains quite well the trends of cross-border acquisitions in the U.S.-Japan case.
Table 4 presents the results for the OLS model (2). This table (and subsequent OLS Tables 8-10) shows the parameters estimates of the model, as well as tests of significance for the explanatory variables, and goodness-of-fit tests for the model. The results in Table 4 support the findings from the logit analysis. That is, although the model as a whole performs quite well, as indicated by the F-value, only the stock prices in the U.S. and Japan are significant at the 5% level or better, and the bond yield differential is significant at the 10% level (a TABULAR DATA OMITTED slight improvement over the logit analysis). The signs of the coefficients are as expected and follow from the same rationale provided within the logit discussion. Again, the exchange rate variable (EXRATE) is not significant and the probable cause is the presence of multicollinearity. As Kennedy (1985) explains, although the OLS estimator retains its desirable properties in the presence of multicollinearity, the variances of the OLS estimates may turn out to be quite large.(9) Our emphasis is on the combined impact of the exchange rate, cost of debt (i.e., bond yields) and equity prices which explains quite well the trends of cross-border acquisitions in the U.S.-Japan case.
The results for the models (2a), (2b), and (2c), with the explanatory variables lagged one, two, and three periods, respectively, are presented in Tables 5 through 7 (logit) and 8 through 10 (OLS). In general, the lagged models do not explain the U.S.-Japan cross-border acquisitions better than the contemporaneous models. From a predictive standpoint, however, note that the significance of the stock prices (for the U.S. and Japan) and bond yields fades and that the exchange rate increases with the size of the lag. In a previous study with quarterly data, Vasconcellos, Madura and Kish (1990) found the exchange rate TABULAR DATA OMITTED to be significant in cross-border acquisitions involving U.S. and British firms.(10) Thus, it is conceivable that the exchange rate performs the role of predictor of trends in cross-border acquisitions, with the costs of debt and, in particular, the stock prices being the deciding factors on a contemporaneous basis.
Summary and Conclusions
The motivations involved in the complex web of international capital flows represent an important dimension of competitiveness. Cross-border mergers and acquisitions are one important manifestation of these capital flows. In fact, the globalization of business and finance is one of the most important economic phenomena which surfaced in the post-World War II era. This globalization took two major forms: international portfolio investment and foreign direct TABULAR DATA OMITTED TABULAR DATA OMITTED TABULAR DATA OMITTED investment. To be sure, both forms have existed for much longer, with portfolio investment generally dominating foreign direct investment. The magnitudes involved soared in the last 45 years, however.
In addition, foreign direct investment became important to such an extent that it has become an integral part in discussions and policy analyses of U.S. competitiveness vis-a-vis other major industrial nations. In the context for foreign direct investment, in turn, cross-border acquisitions became even more visible. Accordingly, the study of this form of foreign direct investment in the U.S.-Japan case received detailed attention in this paper, which should perhaps better be seen in the context of the several angles from which the competitiveness question has been examined in prior research.
Cross-border mergers and acquisitions are a major component of international direct investment. This study examined some of the favorable as well as the unfavorable factors which, on a priori grounds, may be expected to affect these transactions. In addition, a model of cross-border acquisitions in a capital budgeting framework provided the theoretical underpinnings for the relevant variables in cross-border acquisitions involving U.S. firms.
Finally, empirical analysis of the cross-border acquisitions between American and Japanese firms was performed for the period 1982-1989, using both contemporaneous and lagged statistical models. The results suggest that, in the U.S.-Japan case, stock prices and the costs of debt financing are major contemporaneous causal factors, whereas the exchange rate only acquires significance as a predictor of trends in acquisitions.
As the decade of the 1990s unfolds, the trends in international capital flows continue to show the Japanese economy as a major source of foreign investment, either direct or on a portfolio basis despite a marked recent slowdown. The imbalances present in the American economy, evidenced by the budget and current account deficits, have not been resolved. Therefore, it seems that the preponderance of Japanese acquisitions of U.S. firms, with the attendant irritations in the bilateral economic and political relations between the two economic superpowers, is likely to continue as the century draws to a close.
1 This research owes an intellectual debt to Jeff Madura, with whom we collaborated in two previous studies, devoted to modeling the cross-border acquisition decision and to an analysis of the U.S.-U.K. experience in cross-border mergers and acquisitions, respectively. We also thank the participants of the Martindale Center at Lehigh, as well as those who helped us with their comments and suggestions at the meetings of the Financial Management Association and the Academy of International Business, especially Michael Carter. Remaining errors and omissions are our own.
2 Chernotsky (1987), p. 47.
3 Yoshida (1987), pp. 26, 29; emphasis added.
4 A detailed discussion of these factors can be found in Vasconcellos and Kish (1992).
5 For an extended discussion, see Vasconcellos, Madura and Kish (1990) and the references cited therein.
6 The feasibility of a foreign acquisition can be evaluated as a capital budgeting decision, with specific attention to peculiar characteristics. Capital budgeting analysis can be applied to determine whether the net present value (NPV) of applied to determine whether the net present value (NPV) of the acquisition is positive. The following capital budgeting framework, in an expanded format, is shown to be applicable to the foreign acquisition decision in Madura, Vasconcellos, and Kish (1991).
|NPC.sub.FA~ = -(Initial Outlay) + PV (Periodic Cash Flows) + PV (Salvage Value) or in the following expanded equation format:
NPV = -||E.sub.h~ + |D.sub.h~ + |D.sub.f~(|ER.sub.f~)~ + |summation of~ |(|CF.sub.f,t~)(1 - |R.sub.f,t~)(|ER.sub.f,t~)~/|(1 + |k.sub.FA~).sup.t~ + |(|MV.sub.f,n~)(|ER.sub.f,n~)/|(1 + |k.sub.FA~).sup.n~ where t = 1 to n
|NPV.sub.FA~ = net present value of a foreign acquisition;
|k.sub.FA~ = required return on the foreign acquisition;
t = time period; and
n = expected economic life of the project.
|E.sub.h~ = equity funds in the home currency;
|D.sub.h~ = borrowed funds in the home currency;
|D.sub.f~ = borrowed funds in the foreign currency;
|ER.sub.f~ = exchange rate at the time the foreign funds are borrowed.
|CF.sub.f,t~ = foreign cash flows generated during period t;
|R.sub.f,t~ = proportion of cash flows retained by the (then) foreign subsidiary to support future operations;
|ER.sub.f,t~ = exchange rate at the time the cash flows are remitted; and
|MV.sub.f,n~ = anticipated foreign market value of the acquired business at time n.
When expressed as in its expanded format, the capital budgeting approach provides a valuable framework for explaining the influence of several factors on the feasibility of foreign acquisitions. As with any project, the variables above should incorporate any tax implications so that the net present value reflects after-tax cash-flows. In addition, all cash flows should be measured from the acquirer's prespective and in the acquirer's home currency.
7 See Judge, Griffiths, Hill, Lutkepohl, and Lee (1985) for the theoretical justification behind the logistic regression. A comparison of logistic regression and discriminant analysis by Press and Wilson (1978) offers support that logistic regression is preferable to discriminant analysis when the variables do not have multivariate normal distributions within classes.
8 This implies that, in the basic model (equation 2), n = 0.
9 See Kennedy (1985), pp. 146-152.
10 See Vasconcellos, Madura, and Kish (1990).
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Richard J. Kish, Assistant Professor of Finance, Department of Finance, Lehigh University, Bethlehem, PA, U.S.A.
Geraldo M. Vasconcellos, Associate Professor of Finance, Department of Finance, Lehigh University, Bethlehem, PA, U.S.A.
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|Author:||Kish, Richard J.; Vasconcellos, Geraldo M.|
|Publication:||Management International Review|
|Date:||Jul 1, 1993|
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