International finance

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I. Introduction To the eyes of business observers, market has certain characteristics. One of which is the existence of market leaders. As we all understand, there are always one or a group of companies consuming the largest share of market due to their unmatched quality. We might also realize that after these companies achieve leadership for certain amount of time; they usually stay there –despite the ups and downs- for generations. Microsoft in computer technology, Coke in the soda industry, and Nike in the sport shoes industry are examples of those over-decades market leaders.

Perhaps like a restaurant whose cook has found a secret grand recipe, these companies have found a “formula” for success and to gain customers’ trust. What usually happened then was, the “secret formula” merged into company’s culture, becoming values that are highly nurtured and protected by managers. Despite the changes of managers and CEO’s, the formula stays as an integral part of the company, combined into the company’s identity and image, resulting these companies to stay ‘undefeated’ for as long as decades.

For some companies, a well managed Merger and Acquisition (M&A) is a significant part of that formula. Among other benefits, company acquisitions with rivals of the same industry are considered a way to reduce competition, combined managerial techniques and technology, taking advantage of intangible assets and thus increasing profitability and company’s share of the market. These mergers and acquisition has been very popular among multinational companies despite cases of failure are also proven to be abundant.

What are the significances of an international acquisition? Why do companies perform the activity despite the difficulties? And how do they cope with its existing problems? We will find the answer as we examine one of the most famous acquisition practices in the world. But we will first present a brief rationale of mergers and acquisitions in its international nature and examine its benefits and challenges. II. International Acquisitions In this increasingly globalize world, the role of Multi National Enterprises (MNE) are significantly increasing.

The United States’ MNE accounted for approximately 26 % of the country’s GDP, 63 % of its export, 37 % of its import and 68 % of its R&D expenditures on 2002. At the same year, US MNE’s also employed half of the country’s manufacturing workers. Research has also shown that in the high cost countries, MNE’s are evidently more productive than domestic enterprises (Nocke, 2004). In international trade, there are two ways of engaging to a foreign market or making a Foreign Direct Investment (FDI); by making affiliates abroad ( Greenfield Foreign Direct Investment), or taking over existing foreign enterprises (Cross-border Acquisitions).

Most foreign investments take the form of cross-border acquisitions when the price differences factor are small, while greenfield investment is usually applied from high wage countries into low wage countries (Nocke, 2004). Before we present a paradigm designed to describe an overall view of international investments, we will first elaborate common advantages and challenges of mergers and acquisitions including ways to overcome it. II. 1 Advantages of Mergers and Acquisition By nature, acquisition is an entity’s activity of taking over another entity’s ownership.

There are a few well known reasons for mergers and acquisitions as following: o Monopoly In the 21st century, modern countries’ antitrust laws have made it almost impossible for monopolizing a product’s market, but the most obvious advantage of acquisition is still the decreased competition for market share. o Savings Pecuniary savings benefit, which resulted from a stronger bargaining power. Other savings can be caused by economics of scale benefits, acquisitions of technological advantages, or by marketing advantages and social benefits. These savings are of significant consideration in whether to choose or delay an acquisition.

o Reducing management’s inefficiencies Conflict between manager’s goal (profit, salaries, security, underlings, perks, etc) and shareholders interest could be causing unnecessary expenses and ineffective activities. Savings can be produced by replacing an inefficient management with an efficient one. o Other motives Other common motives for acquisitions are premium acquisition deals (financial reason), company’s lack of growth, income tax advantages, diversification of products and last but not the least, empire building purposes. (‘Mergers and Acquisition’, n. d).

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