Chapter 19 International corporate finance

1. Corporate Financial Strategy4th edition Dr Ruth Bender Chapter 19International corporate finance

2. International corporate finance: contents • Learning objectives • Finding an international acquisition target • Doing the deal • Foreign exchange risk • Hedging currency risk • Long-term exchange rate movements (purchasing power parity) (1) • Long-term exchange rate movements (purchasing power parity) (2) • Financing international acquisitions • Depository receipts

3. Learning objectives • Appreciate how international corporate finance differs from the domestic variety. • Explain the three sources of currency risk – translation, transaction and economic – and understand how they can be mitigated. • Understand the theory underlying exchange rate movements. • Evaluate different methods of financing an international acquisition, and appreciate their advantages and disadvantages.

4. Finding an international acquisition target • Will information be available in the target country? • Will information be in a suitable form? • How trustworthy is the information? • Differences in accounting policies • Differences in attitudes to corporate governance • Cultural differences • Language differences • Regulatory constraints on an acquisition A trusted and experienced local adviser is required

5. Doing the deal • Negotiation strategies • Legal context • Availability and interpretation of information • Pricing difficulties • Competition regulations A trusted and experienced local adviser is required

6. Foreign exchange risk

7. Hedging currency risk

8. $1 billion investment – cost of funds 10% £250 million – project return of 20% Expected returns at 20% less cost of funds 10%. Super profit $100m p.a. Produces UK profits of 20% but on inflated (doubled) sales prices Long-term exchange rate movements (purchasing power parity) (1) USA company UK acquisition Fund using US $ converted at spot $4: £1 Repatriation of profits £100m at $2 = $200m $2: £1

9. $500 million investment – cost of funds 10% £250 million, of which £125m raised locally Expected returns of $150m give super profit of $100m after funding cost of $50m. Produces UK profits reduced by funding costs of £125m @ 20%, i.e. £25m. Profits are £75m p.a. Long-term exchange rate movements (purchasing power parity) (2) USA company UK acquisition Fund using 50% UK borrowed funds, $500m US $ funding $4: £1 £75m @ $2 = $150m $2: £1

10. Financing international acquisitions • Raise equity on the home market, and use the proceeds to pay cash to acquire the target • Raise debt, and use the proceeds to pay cash to acquire the target • Raise debt in home currency • Raise debt in target company’s currency • Issue shares tradable in the target’s country, which will be an acceptable currency for shareholders

11. Depository receipts • GDR – global depository receipt – traded outside the USA • ADR – American depository receipt – traded inside the USA and denominated in US$ • Different levels issued, depending on whether they represent new shares (effectively an IPO) or existing shares, and where the shares are traded, and the level of disclosure required. Company outside USA Bank in USA Investors in USA Issues certificate denoting multiple underlying shares to Issues certificates to