Role of Investment Bank in Cross Border M

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					       A sectoral perspective on recent trends
             in mergers and acquisitions

                           WORKS workshop
                         “Catching the butterflies”
                            14 March, Leuven


                         Christian Buelens,
        Directorate-General for Economic and Financial Affairs,
                       European Commission
14 March 2008              WORKS workshop, Leuven                 1
                    Outline
1.    Why study (cross-border) M&A?
2.    Presentation of the M&A database
3.    Recent trends in M&A
4.    Rationale behind mergers
5.    (Brief) reference to empirical work
6.    Possible extensions
7.    Conclusions

14 March 2008      WORKS workshop, Leuven   2
  I. Why study (cross-border) M&A?
• Dramatic increase of FDI/M&A in past 20 years
• Literature on determinants and effects FDI
     – M&A: main component of FDI (above 70%); vs.
       greenfield investment
     – But: M&A predominantly domestic
• Sectoral overview (complementary information
  to FDI)
• Role of MNEs (cross-border mergers)
• Outsourcing and fragmentation
• Measure integration in the EU
14 March 2008        WORKS workshop, Leuven          3
                II. Database
• M&A statistics are based on data provided by
  Thomson Financial Services (TFS)
• Coverage: deals with at least 5% ownership
  change in firm; or 3% if value exceeds $1m
• Both public and private companies
• Worldwide coverage
• Sources: news reports, stock market filings, law
  firms, investment bank surveys etc.
• Endeavour to gather as complete information as
  possible, but information constraints…
14 March 2008     WORKS workshop, Leuven             4
II. Database – available information
• Target and bidding (acquiring) firms’ names
  (+parent firms)
• Firms’ country of origin
• Firms’ industrial sector: 4-digit SIC classification
• Dates: announcement and effective
• Deal value (… for about 48% of deals)
• Deal status: rumour, pending, partially completed,
  completed, withdrawn etc.
• Deal type: cash-financed, stocks
• Other variables (e.g. number of employees)
  generally very patchy

14 March 2008       WORKS workshop, Leuven               5
           II. Database - limitations
•   Classification issues (multiproduct firms)
•   Occasional double-counting (limited)
•   Partial coverage of deals?
•   Merger-Acquisition distinction
•   Apart from the deal information, there is
    little other exploitable information
     Difficult a priori to infer the motives behind a
      particular deal (e.g. outsourcing, pre-emption
      etc.)
14 March 2008        WORKS workshop, Leuven              6
          III. Recent trends in M&A
The following slides are essentially based on
 the last version of DG ECFIN’s Mergers
 and Acquistion Note, which is available at
 the following URL:

http://ec.europa.eu/economy_finance/analys
  is_structural_reforms/product_markets886
  4_en.htm
14 March 2008     WORKS workshop, Leuven    7
                                          III. Worldwide M&A
                      45000                                                                                             4500


                      40000                                                                                             4000


                      35000                                                                                             3500


                      30000                                                                                             3000




                                                                                                                               Value in billion euros
    Number of deals




                      25000                                                                                             2500


                      20000                                                                                             2000


                      15000                                                                                             1500


                      10000                                                                                             1000


                      5000                                                                                              500


                         0                                                                                              0
                              1992 1993   1994 1995   1996 1997   1998 1999 2000   2001 2002    2003 2004   2005 2006

                                                        Number of deals      Value in bn euro

14 March 2008                                            WORKS workshop, Leuven                                                                         8
      III. Evolution of total M&A deals by
            target region (2000-2006)
            16000                                                                          2000
                                          EU (Deals)          US (Deals)    Asia (Deals)
                                                                                           1800
            14000                         EU (Value)          US (Value)    Asia (Value)

                                                                                           1600
            12000
                                                                                           1400

            10000
                                                                                           1200
                                                                                                  Aggregate
    Number
             8000                                                                          1000 value of deals
    of deals
                                                                                                  (€ billion)
                                                                                           800
             6000

                                                                                           600
             4000
                                                                                           400

             2000
                                                                                           200


                0                                                                          0
                    2000   2001   2002    2003         2004          2005      2006




14 March 2008                     WORKS workshop, Leuven                                                         9
      III. Evolution of total M&A deals by
            bidder region (2000-2006)
            16000                                                                            2000

                                          EU (Deals)          US (Deals)      Asia (Deals)
                                                                                             1800
            14000                         EU (Value)          US (Value)      Asia (Value)

                                                                                             1600
            12000
                                                                                             1400

            10000
                                                                                             1200
                                                                                                   Aggregate
    Number
             8000                                                                            1000 value of deals
    of deals
                                                                                                    (€ billion)
                                                                                             800
             6000

                                                                                             600
             4000
                                                                                             400

             2000
                                                                                             200


                0                                                                            0
                    2000   2001   2002    2003         2004            2005        2006




14 March 2008                     WORKS workshop, Leuven                                                           10
                   III. World trends

• The 1990s merger wave peaked in 2000 (1998
  in USA).
• A new wave since 2003 but values are lower
     – Is the current wave healthier than the last one?
• Strong growth of Asian M&A as percentage of
  world total, measured by number of deals.
• Aggregate value of Asian M&A remains
  relatively low


14 March 2008          WORKS workshop, Leuven             11
                III. Targets of EU bidders




14 March 2008          WORKS workshop, Leuven   12
              III. Bidders for EU targets, 2006
                     Origin of bidder:

                                   Domestic        EU CB               ROW   Number of Targets

   EU25                              64,0%         19,0%           17,0%          10417
   EU15                              65,6%         17,5%           16,9%          9863
   NMS                               36,1%         46,6%           17,3%           554

   Austria                           54,5%         31,4%           14,1%            191
   Belgium                           44,4%         36,7%           18,9%            259
   Cyprus                            39,1%         34,8%           26,1%             23
   Czech Republic                    29,6%         47,2%           23,2%            125
   Denmark                           41,7%         32,9%           25,4%            240
   Estonia                           41,4%         44,8%           13,8%             29
   Finland                           61,8%         25,1%           13,1%            275
   France                            71,0%         15,7%           13,3%           1353
   Germany                           56,2%         23,9%           19,9%           1686
   Greece                            57,3%         26,7%           16,0%             75
   Hungary                           34,5%         50,0%           15,5%             84
   Ireland                           50,3%         29,3%           20,4%            167
   Italy                             72,0%         16,2%           11,8%            739
   Latvia                            26,9%         34,6%           38,5%             26
   Lithuania                         25,6%         59,0%           15,4%             39
   Luxembourg                        10,0%         53,3%           36,7%             30
   Malta                             33,3%          0,0%           66,7%              6
   Netherlands                       61,3%         21,4%           17,3%            542
   Poland                            42,4%         46,2%           11,4%            158
   Portugal                          53,7%         36,1%           10,2%            108
   Slovak Republic                   14,3%         78,6%            7,1%             28
   Slovenia                          63,9%         25,0%           11,1%             36
   Spain                             75,3%         15,5%            9,2%            785
   Sweden                            67,7%         17,3%           15,0%            715
   United Kingdom                    72,0%          7,5%           20,5%           2698



14 March 2008                                 WORKS workshop, Leuven                             13
                       III. Intra-EU M&A deals, 2006
                    Bidder location:
                     AT    BE    CY    CZ    DK    EE     FI    FR      DE    EL    HU     IE    IT   LV    LT    LU    MT    NL    PL    PT    SK    SL     ES    SE    UK Total       %
 Target location:
 Austria             104     1    0     1      2    0      0      4     35     0     0      1     3    0     0     1     0      0    2     0     0     0      2     5      3    164    1,9
 Belgium               1   115    0     0      0    0      1     31     13     0     0      1     3    0     0     1     0     22    0     0     0     0      1     2     19    210    2,4
 Cyprus                0     0    9     0      0    0      0      0      0     8     0      0     0    0     0     0     0      0    0     0     0     0      0     0      0     17    0,2
 Czech Republic        5     2    2    37      0    0      1      7     20     0     0      0     1    0     0     1     0      5    1     0     2     0      1     2      9     96    1,1
 Denmark               0     0    1     0    100    0      7      2      7     0     1      3     0    0     0     1     0      9    0     0     0     0      0    36     12    179    2,1
 Estonia               0     0    0     0      0   12      2      1      0     1     0      0     0    0     0     1     0      0    0     0     0     0      1     5      2     25    0,3
 Finland               0     2    1     0      7    3    170      1      2     0     0      0     3    0     0     0     0      1    0     0     0     0      1    32     16    239    2,8
 France                5    27    0     0      5    0      2    961     40     1     0      1    14    1     0     3     0     12    0     3     0     0     19    13     66   1173   13,6
 Germany              47    10    0     4     11    0      9     48    947     2     0      8    27    0     0    17     0     45    0     1     0     0      8    29    137   1350   15,6
 Greece                0     0    3     0      0    0      0      4      2    43     0      0     2    0     0     0     0      1    0     0     0     0      3     0      5     63    0,7
 Hungary               4     3    0     1      0    0      1      6      7     0    29      2     1    0     0     2     0      2    0     0     0     0      0     1     12     71    0,8
 Ireland               1     0    0     0      0    0      0      3      2     0     0     84     0    0     0     1     0      3    0     0     0     0      1     1     37    133    1,5
 Italy                 1     4    0     0      0    0      2     30     15     1     0      1   532    0     0     4     0     12    2     0     0     0     22     2     24    652    7,5
 Latvia                1     0    0     0      0    1      1      2      1     0     0      0     0    7     1     0     0      0    0     0     0     0      0     2      0     16    0,2
 Lithuania             0     0    0     0      1    5      4      2      0     0     0      0     0    0    10     1     0      0    4     0     0     0      0     4      2     33    0,4
 Luxembourg            0     4    0     0      0    0      0      2      0     0     0      0     2    0     0     3     0      2    0     0     0     0      0     0      6     19    0,2
 Malta                 0     0    0     0      0    0      0      0      0     0     0      0     0    0     0     0     2      0    0     0     0     0      0     0      0      2    0,0
 Netherlands           0    18    0     0      5    0      3     12     12     1     0      3     9    0     0     3     0    332    2     1     0     0      5     9     33    448    5,2
 Poland                2     5    0     6      5    0      6      7      9     0     1      0     5    0     1     1     0      8   67     1     0     0      2     3     11    140    1,6
 Portugal              0     0    0     0      1    0      1      6      2     0     0      0     1    0     0     1     0      2    0    58     0     0     16     0      9     97    1,1
 Slovak Republic       5     1    0     1      0    0      1      2      6     0     0      0     1    0     0     0     0      1    0     0     4     0      0     1      3     26    0,3
 Slovenia              0     1    0     0      0    0      0      0      2     0     0      0     2    0     0     0     0      0    0     0     0    23      0     2      2     32    0,4
 Spain                 0     4    0     0      6    0      1     29      7     0     1      2    11    0     0     1     0     13    1    16     0     0    591     7     23    713    8,2
 Sweden                3     1    1     0     22    0     31      9     10     0     0      1     1    0     0     1     0     12    0     0     0     0      2   484     30    608    7,0
 United Kingdom        0    10    0     0      6    0      1     29     37     1     0     33     6    0     0     7     0     37    0     0     0     0     12    23   1942   2144   24,8
 Total               179   208   17    50    171   21    244   1198   1176    58    32    140   624    8    12    50     2    519   79    80     6    23    687   663   2403   8650   100
 %                   2,1   2,4   0,2   0,6   2,0   0,2   2,8   13,8    13,6   0,7   0,4   1,6   7,2   0,1   0,1   0,6   0,0   6,0   0,9   0,9   0,1   0,3   7,9   7,7   27,8    100



14 March 2008                                                         WORKS workshop, Leuven                                                                                           14
                III. Trends in the EU

• EU follows the world pattern of recovery in
  activity since 2003
• Slight fall in share of intra-EU cross-border since
  2000 (but increase in number of deals)
• Increasing number of acquisitions by EU firms in
  Asia and the rest of Europe
• Stronger M&A intensity between neighbouring
  countries
• M&A activity concentrated in large Member
  States

14 March 2008       WORKS workshop, Leuven          15
 III. Global M&A deals by sector, 2000-2006


                                 Bidder sector:




                                                                                                              Wholesale Trade




                                                                                                                                                                      Administration
                                                                               Manufacturing




                                                                                                                                                     Other Services
                                                                                                                                  Insurance and
                                                             Construction
                                 Forestry and




                                                                                                                                  Retail Trade
                                 Agriculture,




                                                                                                                                  Real Estate
                                                                                               industries
                                                                                               Network




                                                                                                                                  Finance,
                                 Fishing


                                                  Mining




                                                                                                                                                                      Public




                                                                                                                                                                                          Total


                                                                                                                                                                                                     %
   Target sector:
   Agriculture, Forestry and
   Fishing                              544       12          4               276                 18          71                  18      452        71                     3           1469       0,8%
   Mining                                13     7158         60               454                235          89                  56     1705       182                    28           9980       5,4%
   Construction                           3       69       1474               365                203          63                  26     1240       343                    15           3801       2,0%
   Manufacturing                        287      478        394             29158                931        1685                 499    13448      2554                    97          49531      26,6%
   Network industries                    29      394        267              1251              10454         262                 146     4249      1476                   190          18718      10,1%
   Wholesale Trade                       56       95         73              2172                251        3104                 420     1969       581                    11           8732       4,7%
   Retail Trade                          30       61         22               782                240         506                4510     2553       681                     8           9393       5,0%
   Finance, Insurance and Real
   Estate                               82       199        378              1538                556         261                 268   27661       1720                 116 32779 17,6%
   Other Services                       36       348        362              4651               2273         740                 662   12556      29681                 130 51439 27,6%
   Public Administration                 1         10         11                38                 49          9                   2     103          59                  87   369   0,2%
   Total                             1081       8824       3045             40685              15210        6790                6607   65936      37348                 685 186211 100,0%
   %                                 0,6%       4,7%       1,6%             21,8%               8,2%        3,6%                3,5%   35,4%      20,1%                0,4% 100,0%




14 March 2008                                      WORKS workshop, Leuven                                                                                                                            16
 III. Global M&A deals by sector, 2006 (2)

• Financial sector is the largest acquiring sector -
  35% worldwide (39% EU)…
• …but represents only 17% (16%) of targets
• M&A deals predominantly occur between firms
  in the same sector – 60% of deals worldwide
  (46% at 2-digit level)
• In the EU this proportion is much higher for
  cross-border (66%) than domestic deals (57%)
• But: caution with interpretation “horizontal” vs.
  “vertical/conglomerate” deals

14 March 2008      WORKS workshop, Leuven              17
      III. Sectoral distribution of M&A, 2000-2006




14 March 2008       WORKS workshop, Leuven           18
         III. Sectoral distribution of M&A

• Manufacturing accounts for much higher
  share of cross-border M&A than of
  domestic deals.
• Strong service orientation of US economy
  reflected in acquisitions made by US firms
  and EU/Asian firms’ acquisitions in USA.
• In Asia, EU firms show particularly strong
  interest in industrial firms.
14 March 2008      WORKS workshop, Leuven    19
 IV. Rationale behind mergers (at firm level)

• Economies of scale and scope
• Synergy and dynamic efficiency (managerial
  ability, know-how, technology)
• Market power
• Market access
• Access to inputs
• Complementarity of products
• Diversification (risk-spreading)
• Preemption
• “Empire-building” CEOs

14 March 2008    WORKS workshop, Leuven        20
      IV. Risks associated with mergers

• Many studies find that at least 50% of
  mergers (especially big mergers) are
  unprofitable
• Overvaluation, over-indebtedness
• Overestimating management capabilities
  (“hubris”)
• Difficulty of integrating the merged
  companies (e.g. different corporate or
  national cultures)
14 March 2008    WORKS workshop, Leuven    21
                V. Empirical Work
• Objective: test the impact of different variables
  on M&A flows
• Gravity model framework most commonly
  applied tool
• Originally developed for trade analysis -
  literature on M&A flows more recent
     – Trade/FDI flows between two countries should
       depend inversely on the distance between them and
       proportionally on their economic size
     – Test the “friction” exerted by particular variables of
       interest (border, language, institutions etc.)

14 March 2008          WORKS workshop, Leuven                   22
    V. Empirical Work (with TFS)
• Manchin, Miriam (2004), Determinants of European
  cross-border mergers and acquisitions
• Objective is to test two hypotheses:
     – Outcome hypothesis: role of institutions in target country
     – Governance hypothesis: change in investor protection (via
       change in legal framework applicable to acquired firm)
• Sample: 1990-2001; EU(15), US, CH, CAN, NO
• Methodology: gravity model
• Findings:
     – gravity model predictions hold
     – Both hypotheses valid
     – No “euro-effect”

14 March 2008             WORKS workshop, Leuven                    23
    V. Empirical Work (with TFS)
• Hijzen, Alexander, Holger Görg and Miriam Manchin
  (2006), Cross-border mergers and acquisitions and the
  role of trade costs
• Distinction between horizontal (same sector) and non-
  horizontal M&A
• Objective is to test tariff-jumping hypothesis: tariffs
  should have a positive effect on horizontal deals
• Sample: 23 OECD countries, 19 industries (SIC-2)
• Methodology: gravity model
• Result:
     – Horizontal and non-horizontal deals react differently to tariffs
     – Effect less negative for horizontal deals

14 March 2008               WORKS workshop, Leuven                        24
            VI. Possible extensions
1. Determinants of cross-border merger
  activity by sector
• Most M&A and FDI studies (Manchin
  (2004), di Giovanni (2003), Bénassy-
  Quéré et al. (2007)) focus on aggregate
  flows
• Objective: analyse how the determinants
  (e.g. distance, production costs, language)
  vary across sectors
14 March 2008      WORKS workshop, Leuven   25
            VI. Possible extensions
2. Cross-border vs. domestic M&A
• Objective: obtain a clearer picture whether
  and why sectoral acquisition patterns differ
  at home and abroad
• Possible measurement of similarity of
  acquisition patterns at home and abroad:
  Finger-Kreinin Index
• Bidder-country-similarity index
14 March 2008      WORKS workshop, Leuven    26
       VI. Possible extensions (2)
• Finger-Kreinin Index:
                simHk  imin(s ; s )   i
                                        H
                                            i
                                            k
where
• si: share of firms acquired in sector i
• H: home (bidder) country
• k: target country
• SIC-2 level
• Indicator ranges from 0 (no similarity) to 1
  (perfect similarity)

14 March 2008      WORKS workshop, Leuven        27
   Finger-Kreinin Index - Illustration
     100
                 5

     90
                                 25

     80
                 35

     70
                                                   5
                                 25
     60
                                                           E
                                                   25      D
     50                                                    C
                 30                                        B
                                                           A
     40


     30                          40
                                                   30
     20          20


     10
                                  5                5
                 10
                                  5                5
      0

                Home          Country k         FK-Index


14 March 2008          WORKS workshop, Leuven                  28
       VI. FK-Index example (Germany)
                                Foreign portfolio of "home firms" (Germany) relative to domestic portfolio,
                                                             1995-2006 (SIC-2)

                   1



                 0,9



                 0,8



Similarity (with
                 0,7
domestic M&A)



                 0,6



                 0,5



                 0,4
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 14 March 2008                                          WORKS workshop, Leuven                                29
                   VI. FK-Index example (US)
                                             Foreign portfolio of "home firms" (US) relative to domestic portfolio,
                                                                      1995-2006 (SIC-2)

                        0,8




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Similarity (with
                        0,7
domestic M&A)




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                                                                                                         Target country



   14 March 2008                                                               WORKS workshop, Leuven                                                                        30
                  Conclusion
• M&A database
• Potentially rich and valuable tool for
     – FDI analysis (subset)
     – domestic restructuring




14 March 2008       WORKS workshop, Leuven   31
                  Thank you!

More information:
• christian.buelens@ec.europa.eu
• http://ec.europa.eu/economy_finance/analysis_structural
  _reforms/product_markets8864_en.htm



14 March 2008        WORKS workshop, Leuven             32

				
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Description: Role of Investment Bank in Cross Border M document sample