The Concern of American Competitiveness Finance Essay

Published: 2021-06-29 02:00:04
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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 empiricalâA¢”šA¬A¦ The recent French and Dutch votes rejecting the European Union’s constitution could hamper cross-border merger and acquisition activity, at least indirectly, if they retard efforts to standardize various regulatory regimes. But the “no” votes are not expected to have a material impact on foreign investment in Europe, or on M&A, according to European and international corporate lawyers. With widely varying corporate, labor and tax laws among member states, cross-border mergers in Europe are often cumbersome, if not outright difficult. A “yes” vote for the proposed constitution would have speeded the streamlining of various regulatory regimes, according to Peter Goes, an M&A partner at the Benelux law firm of NautaDutilh N.V.âA¢”šA¬A¦ I. INTRODUCTION The growing web of interdependencies in the global economy has developed new relationships between economic agents of different countries. In the last decade, an interesting phenomenon surfaced in the international market for corporate control. The number of foreign firms acquiring U.S. firms, in aggregate terms, has been larger than the number of U.S. firms taking over foreign companies. For instance, during the 1981-1990 period the average number of transactions per year involving a foreign bidder for a U.S. company was 218 and the yearly average dollar amount for the same period was $23.4 billion. We can contrast with this the average number of transactions and dollar amounts involving U.S. bidders for a foreign company which were 147 and $8.5 billion respectively. Thus, as Table 1 shows, U.S. companies have played mainly a target role in the cross-border market for corporate control. The exact motivations for observing U.S. firms as targets outnumbering bidders are many (e.g., macroeconomic factors, firm-specific financial characteristics, corporate strategic moves, political motives, and/or the possibility of a “good buy”). The focus of our study is on this final factor, management’s quest for undervalued assets. Table 1. Cross-border Merger And Acquisition Activity Involving U.S. Companies Year U.S. Target U.S. Bidder Transactions Billions ($) Transactions Billions ($) 1981 243 18.1 10 11.1 1982 153 5.1 121 0.8 1983 125 5.9 146 2.5 1984 151 15.5 147 2.6 1985 197 10.9 175 1.4 1986 264 24.5 180 5.2 1987 220 40.4 142 11.0 1988 307 55.5 151 14.5 1989 285 40.4 220 22.2 1990 266 33.0 266 18.0 Average 218 23.4 147 8.5 Source: Mergerstat Review International mergers and acquisitions research focuses primarily on wealth transfers. For instance, Doukas and Travlos (1988), besides offering an excellent review of this literature, contrasts the returns to shareholders from U.S. and non-U.S. based firms expanding into foreign markets. Conn and Connell (1990) also include an extensive literature review of merger and acquisitions within their empirical study of wealth transfers between U.S. and British firms expansion into each other’s markets. Outside of the wealth transfer research, empirical international merger and acquisition research is lagging behind its domestic (e.g., U.S.) counterpart which is rich in studies from the perspective of both sides of the negotiation table. In this tradition, Harris and Ravenscraft’s (1991) linkage of the undervaluation, management inefficiency, and market imperfections hypotheses provides the theoretical foundation for our empirical testing. Thus, our contribution to the merger literature is the empirical validation of undervaluation as one of the key financial motivations underlying acquisitions in the international arena. Under our hypotheses, we postulate that the existence of product and service market imperfections that cause frictions in the global market (such as transaction costs and costs associated with barriers to entry) contributes to favor the acquisition of a company already operating. This is because the amount paid for an existing company, as compared to the replacement cost of its assets, more than compensates for the costs that could have been incurred had the foreign firm started with brand new facilities. Thus, in order to minimize the acquisition costs, foreign firms should follow the same pattern of analysis as their domestic counterparts and search for undervalued and/or mismanaged companies as targets for their acquisitions.(1) The results of our undervaluation hypotheses testing, within the Tobin’s q framework utilized by Servaes (1991) for the study of domestic mergers, support this viewpoint.(2) To our knowledge, there are no other studies on cross-border merger and acquisitions that validate the theoretical undervaluation hypothesis within an international setting. Other domestic M&A studies, such as Palepu (1986) and Dietrich and Sorensen (1984), provide the foundation for our use of the logit methodology for predicting acquisition targets. Palepu (1986) also stresses the need to take into account the fact that the targets and bidders are oversampled and therefore the Maximum Likelihood estimators might be biased. We attempt to compensate for this problem by using a choice-based sample based on a Weighted Maximum Likelihood Estimator (hereafter WMLE) as explained in Appendix II and outlined by Manski and McFadden (1981). Consistent with previous studies applied to the domestic market for corporate control (see for example Chappel and Cheng, 1984), we hypothesize that undervalued U.S. companies are more likely to be targets of foreign companies. Thus, our first hypothesis, Undervaluation-Target Hypothesis, is described as: H1: The likelihood of a U.S. firm becoming a target increases when the firm is perceived as being undervalued. Within the empirical analysis, we proxy this undervaluation with Tobin’s q (i.e., the ratio of market value to replacement cost of assets of the U.S. firm), which is a continuation of the approach pioneered by Tobin (1969). Since then many other researchers have used Tobin’s q as both a theoretical and an empirical tool to establish a relationship between the product or service markets and the capital markets. For instance, Chirinko (1987) concludes that the theoretical usefulness of Tobin’s q stems from the fact that it incorporates forward-looking behavior, reflects optimal choices, and contains estimated coefficients that are readily identified. Under this hypothesized relationship, investment (i.e. the addition to the stock of capital) is determined by the marginal “q”, defined as the ratio of the discounted future revenues from an additional unit of capital to its net-of-tax purchase price. However, due to difficulties of empirically valuing a marginal “q”, our study relies on an average “q.” This proxy is supported by Tobin and Brainard (1977), who emphasized that the forces of continuity in the economy are strong and that we can expect that the same factors which raise or lower “q” on the margin will likewise raise or lower “q” on the average. Assuming that the takeover decision is motivated by the same stimuli that encourage firms to grow internally, Chappell and Cheng (1984) were among the first to study the “q” ratio as a predictor of takeover targets. They found that the high abnormal returns experienced by acquirers before the merger are consistent with a high “q” ratio, signaling to the companies that it is time to expand. Nevertheless, they concluded that the effect of the “q” ratio is not always significant and that these effects vary. Holly and Longbottom (1988), using the same framework followed by Chappell and Cheng (1984), analyzed U.K. firms and found that if the average “q” ratio is more than one, the takeover (i.e., investment) is desirable. If it is less than one, it is not. Lang, Stulz and Walking (1989) studied tender offers and their relationship to Tobin’s q. Under theâA¢”šA¬A¦

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