Cross-border Merger and Acquisitions, Ideal Currency, Impact of the Global Financial Crisis - Assignment Example

Business Section A Cross-border Merger and Acquisitions In the recent past there has been a rapid increase in the number of cross-border mergers and acquisitions. Consequently, this trend has often been a catalyst for industrial globalization as well as realignment of the industrial sector (Campbell, 2011). By definition, mergers and acquisitions can be described as the purchase of a company’s ownership or part of its assets by another company. In other words, these types of transactions imply that existing assets are consolidated in a new shape. More often than not, the process of asset recombination occurs whenever corporate assets are not used in the best possible way (Depamphilis, 2013). Hence, the combination of two or more assets should be more valuable and worthwhile than the sum of its parts. The process of cross-border mergers and acquisitions can be organized into a logical sequence of steps that should be conducted in order to come up with a set of meaningful and feasible strategic alternatives (Evenett, 2003). There are common elements that are pertinent when undertaking cross-border mergers and acquisitions namely; identification and valuation, payment of the transaction, and post-acquisition management Vadapalii, 2007). The use of these elements was evident in the merger of British Petroleum and Amoco. This deal was considered to be among the largest cross-border mergers and acquisitions to be executed on American soil (Bruner, 2004). It all began with identification and valuation; whereby, the process of establishing the target market comes way before the identification of the target firm. If a firm would want to venture in a highly developed market, perhaps it would be prudent to go for public listed firms. Such firms are considered to have market structures that are well-defined as well as operational and financial data that are within the public domain (Kang, 2000). On the other hand, it is possible to identify firms whose market prospects can only be described as promising. Such firms fall within the emerging markets structure and they can be either government or private owned firms. However, the acquiring firm will be compelled to enlist the services of acquisition specialists since firms within this market structure will often pose problems such as limited financial data, restrictions of foreign purchases, scant depth of management, and the firms not being publicly listed. However, privatization programs in the better part of 1990s provided a host of new firms for cross-border merger and acquisitions that were not easy to come by in previous times (Moressi & Pezzi, 2004). After the firm has completed the identification process, valuation of the target firm begins. There is a wide range of valuation techniques that are employed in cross-border mergers and acquisitions, and each of these techniques often come with their own merits. In this environment, the valuation process is driven by business issues, as well as national and international tax and accounting regulations (Kang, 2001). In the merger and acquisition of British Petroleum and Amoco, the governments of United States and United Kingdom had issued new accounting rules for cross-border mergers, acquisitions and transactions. Valuation of the target firm helps to not only determine the value of the firm as well the exact value of the entire transaction, but to establish whether the cost of the whole process is financially viable (Hizjen, 2006). After the identification and valuation of the target firm, the second element that comes into play is the payment of the transaction. Other elements involved before the payment part is completed include; approval from the ownership and/or management of the target firm and the relevant government agencies (Kyvik, 2011). Thereafter, the firm embarks on the process of determining the most appropriate form of compensation which is often an intricate and time-consuming exercise. While determining the type of settlement or payment that will be employed, a number of factors come into play. These factors include; availability of cash, the stake that is being acquired from the target firm, the nature of agreement in the acquisition process, and the valuation results of both the target firm and the acquiring firm. More often than not, most cross-border mergers and acquisitions flow smoothly, but the problem arises when the firm is publicly listed and its acquisition does not get the approval of the company’s management (Hitt & Harrrison, 2001). In this case, it is the duty of the acquiring firm to convince the management of the target company of the financial logic behind the acquisition. In the event that everything has fallen into place, it is up to the acquiring company to complete the payment process (Pahl & Ritcher, 2009). If the target firm is publicly listed, its shareholders are typically compensated by cash or in the form of shares. Post-acquisition management is the third element of the cross-border merger and acquisition process. Although a lot of efforts are put in the execution of the first two elements, management of the acquisition after it has being acquired is perhaps the most critical element in the entire process. Regardless of whether the acquiring firm has paid a colossal amount of money, the investment will go down the drain if the post-purchase process is not managed properly (Udin & Boateng, 2014). Post-acquisition management is often that point where the acquiring firm must realize the motivational aspect of the transaction. Such aspects include injection of additional capital that was probably not within the means of the target firm, effective management, and extra vigour that comes with the merger et cetera (Punnett, 2004). As it was the case with British Petroleum and Amoco, there is often a risk of finding it difficult to bond different corporate cultures at once. In the end, the true worth of cross-border mergers and acquisitions is either gained or lost based on the perceptions of the stakeholders (Gerven, 2010). Section B Ideal Currency Money, a commodity or medium of exchange has a long history that can only summarized as interesting. In fact, people have become more dependent on money such that their wishes are often motivated and controlled by the desire to have more of the commodity (Baimbridge & Whyman, 2014). The United States has faced a trilemma while it tries to maintain its currency as the ideal currency. However, Robert Zoellick who was once the World Bank President had warned that the international primacy of the US dollar cannot last forever (Grubb, 2013). This is in light of the fact that some countries that are not traditional ally of the United States such Germany and Japan as well as potential adversaries such as China have become stakeholders in the dollar (Piros & Pinto, 2013). Even as it aims to protect the dollar, a lot of countries that might wish, in an ideal world, to witness the fall of the dollar, have no interest in its rapid and sudden collapse. However, these countries whose main aim is not necessarily meant to eliminate the dollar as the ideal currency, are working round the clock to curtail the role of the dollar. If successful in their quest, they will take away some of the advantages that dollar primacy currently conveys. It is such factors that are possibly giving bureaucrats at the Treasury Department sleepless nights as they aim to maintain the dollar as the ideal currency. China, a country that is often considered as a rising political challenger to the United States, retains a strong interest in maintaining a global economic system that is dominated by the US dollar. In terms of the US debt, China is the leading foreign holder and a key supporter of the US dollar as a currency for global reserve. The position of the United States as a global leader has been inextricably connected to the strength and influence of its currency. The US dollar has been the de facto currency of the global economy since the end of the World War II. By 2009, nearly two-thirds of the reserve assets of both developing and developed countries were held in the form of dollars. As a result the United States has being forced to maintain close security ties with countries that have embraced the dollar and those that have often viewed themselves as America’s close trading and investment partners. To date, energy producers in the non-communist world have being of immense value to the United States since they have always set the price of oil in dollars, and this concession has been running smoothly over the years. As a means of maintaining the dollar as the ideal currency, the United States has financed its economic system and sought to alleviate the risk of overstretch. This has been achieved by finding other countries to act as donors, either by providing monetary resources as this helps to defray expenses (Grubb, 2011). Furthermore, the United States encourages commercial banks to re-lend their foreign deposits to multinational firms which might then use the money to purchase a foreign security or make a direct investment abroad. Indeed, the relationship between foreign liquid investments in the United States and U.S. long term investments abroad is the heart of maintaining the dollar as the ideal currency. The thesis focuses on the differences in investment preferences between the United States and Europe. As for the European investors, they allegedly prefer highly liquid assets; hence, they invest in the United States on a short term basis (Bergesten, 1996). This is because the desire of the European investors to incur long-term liabilities is often met by the American lenders. This result is reinforced by increased levels of competition and lower costs provided by U.S. financial institutions as opposed to those in Europe. As a result, capital flows to the United States on a short-term basis and back to Europe on a long term basis. This way, the dollar gets a lifeline and it continues to be the global ideal currency. Based on this outcome, it is plausible to imagine that capital outflows emanating from the United States generated increased liquidity in Europe and other parts of the world much of which is deposited in the United States. In addition, the foreign demand pattern determines both short-term and long-term inflows. This often goes a long way in ensuring that the dollar remains relevant in the global economy. The United States seeks to maximize the international role of the dollar. The main benefit that comes with an active dollar at the global scale is the potential financing for U.S. payment deficits, the political leverage which they bring, and the financial benefits which accrue mainly to American citizens. Furthermore, the government has put in more efforts to promote the role of the dollar which creates an effective exchange-rate adjustment system, which is its primary objective in monetary reform. The United States has gone an extra mile in reducing as much as possible the costs of the existing dollar overhang and any additional dollar balances that may exist. Currently, the United States is paying market interest rates on the outstanding dollars (Frenkel & Goldstein, 1991). The key role of the dollar as the ideal global currency has compelled the United States to develop interest in the monetary system, since all financial issues involve the dollar. Failure to do this would point to a sharp reduction if not the fading role of the dollar as the global ideal currency (Kegley & Blanton, 2014). Section C Impact of the Global Financial Crisis In 2008, a financial crisis was staring everyone at their faces. At that time, the world faced much more than a financial crisis. In light of this, it would be necessary to consider the side effects or implications of the financial crisis. By doing this, it makes it easier for one to understand the policy decisions that led to the rise or emergence of the global financial crisis (Knecht, 2014). The crisis changed the financial and economic landscape of world economies. As a result, the world economy was the victim of the deepest downturn in decades. The industrialized countries were the biggest casualties of this economic disaster as the forecasts of their real growth dropped to a decline of two per cent against a projected estimate of a modest 0.5 per cent. United States was among the hardest hit economies where growth was estimated to decline by 1.6 per cent against the earlier projection of zero. The forecast reduction in global growth amounted to a loss of global gross national product to the tune of $1.2 trillion simply from the downward revision (Sun & Pollard, 2010). However, the financial crisis was an accident waiting to happen. This was largely due to the numerous policy choices that had been put in place primarily in the United States. Nonetheless, the crisis was lengthened and magnified by the policy choices outside the United States before and after the crisis (Desai, 2013). The financial crisis had a major impact on the automotive industry. Multinational companies such as Toyota were impacted negatively as the financial crisis sent sales tumbling overnight across the globe. The scaling model adopted by Toyota turned into a losing game. This unprecedented decline in demand tore the veil from a series of issues that had simply been patched up courtesy of the company’s spectacular growth over the years. The company which was often considered as a beacon of success suffered from an overdependence of the American and Japanese markets, yet it was on these markets that demand for its vehicles had fallen steeply. In fact, a significant share of Toyota’s production capacity is located in Japan and America. As a result of the financial crisis, Toyota had to cope with the global overcapacity of vehicles, since it was capable of producing up to 9 million vehicles annually. The emergence of the financial crisis exposed the company’s global production and sales strategy. While the company’s base of production is in Japan, with 2.9 million vehicles produced in fiscal 2008 being exported abroad, more than 50 per cent of these vehicles were taken to the North American markets. Ironically, North America was the bedrock of Toyota’s problems as the company suffered one of its worst losses as its sales tumbled roughly at the same rate as overall demand. Before the crisis came to be, demand of vehicles in the U.S. was on the rise largely due to the cheap leasing deals, which came to back to bite all the manufacturers operating in the American market as they suffered from leasing returning and falling prices for used cars (Oldani et al, 2011). Toyota was not left out either, with its financial services branch registering an operating loss of more than half a billion dollars. This loss was inclusive of the exchange rate fluctuations. The large number of SUVs and pickups within the company’s product range unmasked another mistake that had probably been covered by its success in the North American market. This large fleet of vehicles were only sold in small numbers. Part of the problem behind these low sales margins was because the company’s product philosophy became obvious, and the existing market leader took full advantage of the situation to market vehicles that were considered to be environmental-friendly such as the Prius. These vehicles registered successful sales in some regions of the USA; hence, this meant that companies manufacturing them posted big turnover. In spite of Toyota having a flexible production system, the company had to sit down and watch as its market share whizzed away while at the same time, the company was still churning out SUVs. However, dealers were having troubles to sell these vehicles despite their storage facilities been full to capacity. The global financial crisis saw Toyota scaling back its production and to some extent, it shut down its factories in America and Japan for months. Just when there appeared to be light at the end of the tunnel and the company had put in place plans to ramp-up in-country production, an earthquake hit Japan and Toyota was back to its knees. Prior to the earthquake, Toyota was producing more than enough vehicles to satisfy the American market, but in 2011, Toyota was not in a position to sustain the American market demands (Kates, 2011). That being said, Toyota acted fast to overcome the effects of the global financial crisis and those of earthquake by reporting that it will return to full scale production by the end of 2011. Toyota had strived to resuscitate its overseas production plant which had become more important to its progress in recent years. Afterwards, the company stepped up its production of SUVs by investing $500 million in its Princeton assembly plant in Indiana (Chossudovsky, 2010). This investment was meant to shield Toyota from the unstable exchange rates and increase production in the North American market. A new plant was set up in Mississippi and it was scheduled to develop the Corolla compact sedan beginning 2011 (Grant & Wilson, 2012). As the company had projected to get back to full production, its aim was to develop Corollas in Mississippi that were to be supplied in the North American market. Nevertheless, as the company was recovering from the effects of the global financial crisis, the Japanese currency was getting stronger and the dollar was weakening by the day. This trend did not show any sign of slowing down and this sudden gain in value of the yen meant that customers abroad were suffering from the high cost of buying Toyota cars. When the Japanese yen was strong against a weakening dollar, it came with various simultaneous effects. To begin with, it led to a decrease in the cost of raw materials, since they are often paid for in dollars. However, this was not good news to the large number of exports in the company’s sales records and the company’s President had floated the idea of temporarily halting production in Japan (Wimmer, 2011). In spite of the slow recovery of US economy after the economic crisis and poor sales margins in Japan, the company did not consider increases in physical capacity. This is despite the fact that the company planned to establish some new facilities in the region affected by the earthquake in addition to physical capacities. This strategy helped the company to avoid the negative effects of yen in the overseas market and import tariffs. In the long run, the economic crisis revealed the high level of capital expenditure as a weakness in the company’s expansion strategy. This strategy forced the company to put itself in a draconian course of savings that called for a decrease in capital expenditure in the 2010 financial year, which meant that the company needed to halve the previous level of capital expenditure (Ciro, 2013). References Baumol, W. & Blinder, A. (2015). Economics: Principles and Policy. Boston: Cengage Learning. Baumol, W. & Blinder, A. (2015). Macroeconomis: Principles and Policy. Boston: Cengage Learning. Bergesten, C. F. (1996). Dilemmas of the Dollar: The Economics and Politics of United States International Monetary Policy. New York: M. E. Sharpe. Baimbridge, M. & Whyman, P. B. (2014). Crisis in the Eurozone: Causes, Dilemmas and Solutions. Baylis, J et al (2013). The Globalization of World Politics: An Introduction to International Relations. Oxford: Oxford University Press. Blecker, R. A. (1992). Beyond the Twin Deficits: A Trade Strategy for the 1990s. New York: M. E. Sharpe. Brands, H. W. (2011). Greenback Planet; How the Dollar Conquered the World and Threatened Civilization as We Know it. Austin, TX: University of Texas. Bruner, R. (2004). Applied mergers and acquisitions (Univ. ed.). Hoboken, NJ: Wiley. Campbell, D. (2011). Mergers and acquisitions in Europe: Selected issues and jurisdictions. Alphen aan den Rijn, The Netherlands: Kluwer Law International. Carbaugh, R. J. (2012). Contemporary Economics. New York: M.E. Sharpe. Chossudovsky, M. (2010). The global economic crisis: The Great Depression of the XXI century. Montréal: Global Research. Ciro, T. (2013). The Global Financial Crisis: Triggers, Responses and Aftermath. Burlington: Ashgate Publishing. Claessens, S. (2001). Resolution of financial distress an international perspective on the design of bankruptcy laws. Washington, D.C.: World Bank. Dakers, M 2015. ‘London stockbrokers resist mergers despite ‘perfect storm’ of threats’, The Telegraph 1 Feb. Available from [1st February 2015] Depamphilis, D. (2013). Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to Process, Tools, Cases, and Solutions. San Diego, CA: Academic Press. Desai, P. (2013). From Financial Crisis to Global Recovery. New York: Columbia University Press. Dolezalek, H. (2012). The global financial crisis. Edina, Minn.: ABDO Pub. Evenett, S. (2003). The Cross Border Merger and Acquisitions Wave of the Late 1990s, Issue 9655. Massachusetts: National Bureau of Economic Research. Frenkel, J. A. & Goldstein, M. (1991). International Financial Policy: Essays in Honor of Jacques J. Polak. Washington: International Monetary Fund. Gells, D 2014. ‘Markets Buoyant, Merger Activity Picks Up’, The New York Times 1 January. Available from [1st January 2014] Gerven, V.D. (2010). Cross-Border Mergers in Europe: Volume 1. Cambridge: Cambridge University Press. Grant, W. & Wilson, G. K. (2012). The Consequences of the Global Financial Crisis: The Rhetoric of Reform and Regulation. Oxford: Oxford University Press. Gregoriou, G. (2007). Corporate governance and regulatory impact on mergers and acquisitions research and analysis on activity worldwide since 1990. Amsterdam: Academic Press. Grubb, F. (2011). The Continental Dollar initial design, ideal performance, and the credibility of congressional commitment. Cambridge, Mass.: National Bureau of Economic Research. Grubb, F. (2013). The Continental dollar how the American Revolution was financed with paper money--initial design and ideal performance. Cambridge, Mass.: National Bureau of Economic Research. Hijzen, A. (2006). Cross-border mergers and acquisitions and the role of trade costs. Brussels: European Commission, Directorate-General for Economic and Financial Affairs. Hitt, M., & Harrison, J. (2001). Mergers and acquisitions a guide to creating value for stakeholders. Oxford: Oxford University Press. Jer, M. (1999). Balance of payments, exchange rates, and competitiveness in transition economies. Boston: Kluwer Academic. Kang, N. (2001). New patterns of industrial globalisation cross-border mergers and acquisitions and strategic alliances. Paris: Organisation for Economic Co-operation and Development. Kang, N. (2000). Cross-border Mergers and Acquisitions: Their Role in Industrial Globalisation. Washington: OECD. Kates, S. (2011). The Global Financial Crisis What Have We Learnt?. Cheltenham: Edward Elgar Pub. Kegley, C., & Blanton, S. (2014). World politics: Trend and transformation, 2013-2014 update edition (2013-2014 updated ed.). Boston, MA: Wadsworth. Knecht, M. (2014). Diversification, industry dynamism, and economic performance the impact of dynamic-related diversification on the multi-business firm. Wiesbaden: Springer Gabler. Kyvik, O. (2011). Cultural Complexities in Cross Border Mergers & Acquisitions. München: GRIN Verlag GmbH. Lachmann, R. (2014). The United States in decline. Bingley, U.K.: Emerald. Lee, C. (2006). Encyclopedia of finance. New York: Springer. Manchin, M. (2004). Determinants of European cross-border mergers and acquisitions. Brussels, Belgium: European Commission, Directorate-General for Economic and Financial Affairs. Morresi, O., & Pezzi, A. (2004). Cross-border mergers and acquisitions: Theory and empirical evidence. New York: Palgrave Macmillan. Oldani, C. et al (2013). Global Financial Crisis: Global Impact and Solutions. Burlington: Ashgate Publishing Ltd. Pahl, N. & Ritcher, A. (2009). International Strategic Alliance and Cross-Border Mergers & Acquisitions. USA: Books on Demand. Piros, C. D. & Pinto, J. E. (2013). Economics for Investment Decision Makers. New Jersey: Punnett, B. (2004). Handbook for international management research (2nd ed.). Ann Arbor: University of Michigan Press. Wiley. Sentance, A 2015. ‘Now is the time to protect against the next global economic calamity’, The Times 8 April. Available from [8th April 2015] Siddaiah, T. (2010). International financial management. Upper Saddle River, NJ: Pearson. Shamah, S. (2004). A Currency Options Primer: New Jersey: John Wiley & Sons. Sun, W., & Pollard, D. (2010). Reframing corporate social responsibility. Bingley: Emerald. Uchitelle, L, 1998. ‘Shaping Global Giant: The Multinationals; Some Cross-Border Deals May be Star-Crossed’, The New York Times 8 May. Available from . [8th May 1998] Uddin, M., & Boateng, A. (2014). Cross-border mergers and acquisitions: UK dimensions. New York: Routledge. Vadapalli, R. (2007). Mergers acquisitions and business valuation. New Delhi: Excel Books. Wimmer, E. (2011). Motoring the Future: VW and Toyota Vying for Pole Position. New York: Palgrave Macmillan. Wolf, M 2014. The Shifts and the Shocks: What we’ve learned – and have still to learn- from the financial crisis, USA: Penguin Books Limited. Read More