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Courage is not the absence of fear. It is doing the thing you fear the most.
Rick Warren
Business Alliances
Cross-Border Transactions
Learning Objectives
Primary Learning Objective: To provide students with an understanding of how to analyze and value cross-border M&As Secondary Learning Objectives: To provide students with an understanding of Motives for international expansion Common international market entry strategies Planning and implementing cross-border transactions in developed countries Planning and implementing cross-border transactions in emerging countries. Valuing cross-border transactions Empirical studies of financial returns to international diversification
Discussion Questions
1. What are the differences between segmented and globally integrated capital markets? How do these distinctions affect prices of financial assets of comparable risk and maturity in various countries? Of the various motives for international expansion, which do you believe is the most common and why? Do you believe that some market entry strategies are more suitable for emerging than for developed countries? Explain your answer.
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Converting Euro-Denominated into Dollar-Denominated Free Cash Flows to the Firm Using Interest Rate Parity Theory Targets Euro-Denominated FCFF Cash Flows ( Millions) 2008 124.5 2009 130.7 2010 136.0
Target Countrys Interest Rate (%) U.S. Interest Rate (%) Current Spot Rate ($/) = 1.2044 Projected Spot Rate ($/) =
4.50 4.25
1.2015
4.70 4.35
1.1964
5.30 4.55
1.1788 $160.32
Targets Dollar-Denominated $149.59 $156.37 FCFF Cash Flows ($ Millions) Notes: Calculating the projected spot rate using Interest Rate Parity. ($/)2008 = {(1.0425)/(1.0450)} x 1.2044 = 1.2015 ($/)2009 = {(1.0435)2/(1.0470)2} x 1.2044 = 1.1964 ($/)2010 = {(1.0455)3/(1.0530)3} x 1.2044 = 1.1788
Converting Peso-Denominated Into Dollar Denominated Free Cash Flows to the Firm Using Purchasing Power Parity Theory Targets Peso-Denominated FCFF Cash Flows (Millions of Pesos) Mexican Expected Inflation Rate = 6% U.S. Expected Inflation Rate = 4% Spot Rate ($/Peso) = .0877 Projected Spot Rate ($/Peso) Targets Dollar-Denominated FCFF Cash Flows (Millions of $) 2008 P1,050.5 2009 P1,124.7 2010 P1,202.7
.0860 $90.34
.0844 $94.92
.0828 $99.58
Notes: Calculating the projected spot rate using Purchasing Power Parity. ($/Peso)2008 = {(1.04)/(1.06)} x .0877 = .0860 ($/Peso)2009 = {(1.04)2/(1.06)2} x .0877 = .0844 ($/Peso)2010 = {(1.04)3/(1.06)3} x .0877 = .0828
FSP
Discussion Questions
1. Discuss the primary differences between valuing target firms cash flows in developed versus emerging countries. Be specific. Do you agree or disagree with the many adjustments commonly made to discount rates applied to projected cash flows of target firms in emerging countries? Be specific. In your opinion is it more appropriate to adjust the discount rate for various perceived risks or to introduce risk by utilizing alternative scenarios? Explain your answer.
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Things to Remember
Motives for international expansion vary widely. There are many alternative strategies to M&A for entering foreign markets. Methodology for valuing cross-border transactions is similar to that employed when both acquirer and target firms are within the same country. Basic difference between valuing firms within the same country and those involved in cross-border transactions is that the latter involves converting the targets projected cash flows form one currency to another. Also, the discount rate for firms in emerging nations may be adjusted for risks not normally found in within country transactions. For developed countries whose capital markets are globally integrated, a global beta and a global equity premium should be used to calculate the cost of equity. For emerging nations whose capital markets are segmented, a local beta and equity premium should be used.