Ch. 18 - Multinational Capital Budgeting and Cross-Border Acquisitions

Basic steps in capital budgeting for a foreign project

1. Identify the initial capital invested or put at risk

2. Estimate cash flows to be derived from the project over time, including an estimate of the terminal or salvage value of the investment

3. Identify appropriate discount rate to use in valuation

4. Apply traditional capital budgeting decision criteria such as NPV or IRR

Parent CF’s must be distinguished from ____

project cash flows

Parent CF’s often depend on the ______

form of financing

Almost any project should at least be able to generate a return equal to ____

the yield available on host government bonds

Multinational firms should invest only if they can earn a risk-adjusted return greater than ____

locally based competitors can earn on the same project

Sensitivity Analysis Variables: Project Viewpoint

• Political Risk

• Foreign Exchange Risk

• Other sensitivity variables

• Change in assumed terminal value

• Capacity utiliization rate

• Size of initial project cost

• Amount of working capital financed locally

Sensitivity Analysis: Parent Viewpoint

• Adjusting Discount Rates

• Adjusting CFs

• Shortcomings of Each method

• Repercussions to the investor

  • Fear that taking on foreign projects may increase the firm’s overall cofst of capital because of investors’ perceptions of foreign risk

Portfolio Measurement

• Standard deviation of expected return

• Beta

Foreign investments are motivated by objectives:

• Market-seeking

• Resource-seeking

• Production-seeking

Real Option Analysis

Application of the option theory to capital budgeting decisions

Real Options Analysis is a cross between ____

decision-tree analysis and pure option-based valuation

Real Options Valuation choices

• Option to defer

• Option to abandon

• Option to alter capacity

• Option to start up or shut down

Properties of project finance that influences success

• Separability of the Project from its Investors

• Long-lived and Capital-Intensive Singular Projects

• Cash Flow predictability from Third Party Commitments

• Finite Projects with Finite Lives

By acquiring an existing firm, the MNE ____

shortens the time requierd to gain a presence and facilitate competitive entry into the market

Acquisition may be a cost-effective way of gaining competitive advantages, such as_____

• technology

• Brand names valued in the target market

• Logistical and distribution advantages

Cross-border acquisitions negatives

• Problems with paying too much/suffering excessive financing costs

• Melding corporate cultures can be traumatic

• Managing the post-acquisition process is frequently characterized by downsizing to gain economies of scale and scope in overhead functions

• Additional difficulties:

  • host country intervening in pricing, financing, employment guarantees, market segmentation, and general nationalism/favoritism

Cross Border Acquisition Process

Stage 1: Identification and Valuation

• Identification of potential acquisition targets requires a well-defined corporate strategy and focus

Stage 2: Completion of the Ownership Change

• Process of gaining approval from management and ownership of the target, getting approvals from government regulatory bodies, and finally determining method of compensation can be time-consuming and complex

Stage 3: Post-Acquisition Transition Management

• Probably the most critical of the 3 stages in determining an acquisition’s success or failure

Stage 1 of the Cross Border Acquisition Process

Identification and Valuation

• Identification of potential acquisition targets requires a well-defined corporate strategy and focus

Stage 2 of the Cross Border Acquisition Process

Stage 2: Completion of the Ownership Change

• Process of gaining approval from management and ownership of the target, getting approvals from government regulatory bodies, and finally determining method of compensation can be time-consuming and complex

Stage 3 of the Cross Border Acquisition Process

Stage 3: Post-Acquisition Transition Management

• Probably the most critical of the 3 stages in determining an acquisition’s success or failure

Financial Analysis Strategy of a Cross-Border Acquisition Process

Stage 1: Valuation and Negotiation

Stage 2: Financial settlement and compensation

Stage 3: Rationalization of operations; integration of financial goals; achieving synergies

Currency Risks in Cross-Border Acquisitions

Step 1: Bidding Stage (most risky)

Step 2: Financing Stage (Moderately risky)

Step 3: Transaction Stage (less risky)

Step 4: Operational stage (low risk)