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GABRIEL HAWAWINI*

Valuation of Cross-Border Mergers and Acquisitions

1. Introduction

International alliances and acquisitions are increasingly being used as an entry into new markets or access to lower cost inputs. These cross-border deals, however, are usually complex to evaluate. In this environment, our traditional methods of financial evaluation are often found lacking in determining a target's value. An alternative approach to the valuation of mergers and acquisitions (M&As) is presented in this paper. Known as the adjusted present value (APV), it separately evaluates each component of a cross-border deal. It is shown to offer a higher degree of transparency, accuracy and flexibility in the valuation process, particularly in the context where the price of the acquisition is negotiated around a number of changing deal parameters. In what follows, we review the recent activity in cross-border M& A and then report the results of our

* I would like to thank Bruno Chaintron and Christophe Francois of the Paris Office of Bain and Company as well as Andrew Warburton and David Douglas of INSEAD for their help in preparing this document. Professors Pekka Hietala and Nathalie Dierkens of INSEAD read the manuscript and made valuable comments. Any errors are my sole responsibility. Marie-Laure Guerin provided assistance in carrying out the survey presented in the document and Victoria Sharp provided editorial assistance. survey of the current valuation approaches used by M&A professionals in North America, Asia and Europe. We discuss the challenges posed by an international environment on the traditional valuation methods and conclude with a presentation of the adjusted present value method together with an example of this approach.

2. Cross-Border M&A Activity

2.1 Recent Trends and Future Prospects

Over the five years to 1990, the growth in the cross-border M&A market has far surpassed that of domestic M&As in most industrialised countries. Table 1 shows the recent evolution of M&A activity in five major world economies. The first column gives the total number of completed deals and includes both purchases by and sales of domestic firms. It reveals that cross-border M&A deals grew at an annual average rate of 57 percent between 1985 and 1989 attaining a value of $112 billion and growing to represent over one half of total M&A activity. The Table also shows separately the buying activity of firms in these countries. Thus, while Japanese firms made only 10 cross-border M&A purchases in 1985, by 1989/90 they were completing over 80 cross-border deals per year. Appendix 1 gives the same information for a larger sample of countries.

The slow-down in overall M&A activity that occurred in 1990 is primarily due to the early impacts of economic recession and to some extent, the wait and see attitude adopted by many companies during the build-up to the Gulf war. The UK tended to feel these impacts earlier while France and Italy retained their growth for a few months longer. Nevertheless, except in France, cross-border M&A remained at about the same proportion of total activity- | All| CB c| &CB/A11| Bidder CB|

UK| 1,193| 313| 26%| 241|
Germany| 45| 34| 76%| 16|
France| 35| 29| 83%| 10|
Japan| 12| 10| 83%| 10|
USA| 411| 238| 58%| 44|
Total| 1,696| 624| 37%| 321|
1989|
| All| CB %CB/A11| Bidder CB|
UK| 2,840| 1,013| 36%| 764|
Germany| 1,336| 651| 49%| 196|
France| 852| 612| 72%| 344|
Japan| 91| 89| 98%| 81|
USA| 906| 756| 83%| 252|
Total| 6,025| 3,121| 52%| 1,637|
1990|
| All| CB c| &CB/A11| Bidder CB|
UK| 2,060| 831| 40%| 542|
Germany| 1,374| 671| 49%| 192|
France| 1,249| 649| 52%| 382|
Japan| 95| 90| 95%| 88|
USA| 767| 607| 79%| 219|
Total| 5,545| 2,848| 51%| 1,423|
Table 1: Trends in Number of...
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