19.6 Mergers and Joint Ventures

LG 6 19.6 Mergers and Joint Ventures

The motives for domestic mergers—growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and defense against takeover—are all applicable to MNCs’ interna- tional mergers and joint ventures. And we should consider several additional points.

First, international mergers and joint ventures, especially those involving European firms acquiring assets in the United States, increased significantly beginning in the 1980s. MNCs based in Western Europe, Japan, and North America are numerous. Moreover, a fast-growing group of MNCs has emerged in the past two decades, some based in the so-called newly industrialized countries (including Singapore, South Korea, Taiwan, and China’s Hong Kong), and others operating from emerging nations (such as Brazil, Argentina, Mexico, Israel, China, Malaysia, Thailand, and India). Even though many of these companies were hit hard by economic and currency crises (Asia in 1997, Russia in 1998, and Latin America in 2001–2003), top firms from these and other countries have been able to survive and even prosper. Additionally, many Western companies have taken advantage of these economies’ weakness to buy into companies that were previously off-limits to foreign investors. This has added further to the number and value of international mergers.

The U.S. economy is among the largest recipients of FDI inflows. Most of the foreign direct investors in the United States come from seven countries: the United Kingdom, Canada, France, the Netherlands, Japan, Switzerland, and Germany. The available data indicate that in terms of the method of entry— namely mergers and acquisitions (M&A) versus “establishments”—an over- whelming share of outlays committed by foreign multinationals in the United States between 1980 and 2006 has consisted of M&A. These firms prefer M&A through which they can target U.S. companies for their advanced technology (for example, biotechnology firms), worldwide brands (restaurant chains and food products), entertainment/media (theme parks), and financial institutions (invest- ment banks). In contrast, in most emerging/developing nations (including China), FDI inflows take place primarily via establishments.

Although the United States remains one of the most “open” countries to FDI inflows, some of its actions in recent years have been viewed as less than wel- coming. In 2005, for example, the U.S. governnment opposed a bid by a Chinese state-owned oil company (CNOOC) to purchase an American one (UNOCAL),

PART 8

Special Topics in Managerial Finance

similar opposition, along with an identical outcome, took place in relation to a bid by a firm owned by the government of Dubai (in the United Arab Emirates) to acquire port operations in the United States.

Another trend is the current increase in the number of joint ventures between companies based in Japan and firms domiciled elsewhere in the industrialized world, especially U.S.-based MNCs. In the eyes of some U.S. corporate execu- tives, such business ventures are viewed as a “ticket into the Japanese market” as well as a way to curb a potentially tough competitor.

Developing countries, too, have been attracting foreign direct investments in many industries. Meanwhile, during the last two decades, a number of these nations have adopted specific policies and regulations aimed at controlling the inflows of foreign investments, a major provision being the 49 percent ownership limitation applied to MNCs. Of course, international competition among MNCs has benefited some developing countries in their attempts to extract concessions from the multinationals. However, an increasing number of such nations have shown greater flexibility in their recent dealings with MNCs, as MNCs have become more reluctant to form joint ventures under the stated conditions. Furthermore, it is likely that as more developing countries recognize the need for foreign capital and technology, they will show even greater flexibility in their agreements with MNCs.

A final point relates to the existence of international holding companies. Places such as Liechtenstein and Panama have long been considered promising spots for forming holding companies because of their favorable legal, corporate, and tax environments. International holding companies control many business entities in the form of subsidiaries, branches, joint ventures, and other agreements. For international legal (especially tax-related) reasons, as well as anonymity, such holding companies have become increasingly popular in recent years.