International management exam 2

M&A part
1. International strategy (5 things)
I. Exports (low degree of control and low investments): goods and services that are
produced in one country and sold to buyers in another
Direct distribution: a strategy in which a producer or manufacturer delivers products
II.
directly to the consumer. Using this type of distribution rarely includes the use of
wholesalers or other distributors, as companies typically process and sell the products
themselves
III. Strategic alliance: an arrangement between two companies to undertake a mutually
beneficial project while each retains its independence.
IV. Joint ventures(hybrid): business entity created by two or more parties, generally
characterized by shared ownership, shared returns and risks, and shared governance
V. direct investments (highest level of control and investments) is an investment in the form of
a controlling ownership in a business in one country by an entity based in another country.
It is thus distinguished from a foreign portfolio investment by a notion of direct control.
Company international strategies: 1. Foreign presence without investment 2. Outsource without
investment 3. International presence with investments

2. International strategic general trends:

1. Vertical disintegration : broken a production process into separate companies, each performing a
limited subset of activities required to create a finished product.
2. Horizontal disintegration: Outsourcing functional department
3. Organizational flexibility
4. Lean Management: an approach to managing an organization that supports the concept of
continuous improvement, a long-term approach to work that systematically seeks to achieve small,
incremental changes in processes in order to improve efficiency and quality.
5. Business fragmentation: When a business becomes fragmented, certain aspects of its structure
become separated. This includes corporate leadership, processes, procedures, infrastructure, and
business location. 1. Subsidiaries, holdings 2. Spin offs & spin outs, by split or start ups 3.
Corporate entrepreneurship.
6. Downsizing
7. Reengeniering & industry 4.0
8. Globalization and internationalization
9. Limited organic growth: Organic growth is the growth a company achieves by increasing output
and enhancing sales internally.
10. Unlimited external growth: funding, Mergers, acquisitions and alliances
11. Sustainability: economic, social and environment
12. Economic cycles: VUCA-BANI Environment (constant change, VUCA: volatility, uncertainty,
complexity and ambiguity. BANI: brittle(fragile , anxious, nonlinear and incomprehensible.
13. Digital transformation

3. Legal forms of external growth: external growth modalities

External growth modalities:
i. Integration of companies: statutory or subsidiary merger, consolidation merger (SPV
as topco), partial merger (with subsidiaries)
 ii. Participation of companies: absolute control (+80%) , control mayoritario (50-80%),
control minoritario (-50%)
iii. Alliances and cooperation
iv. Special case: Reverse merger: A reverse merger occurs when a smaller, private company
acquires a larger, publicly listed company. This private company becomes public bc of IPO at
cheaper cost

Legal classification
Control operation
1. Acquisition: When company A buys the shares
(acquires) of company B. Company A becomes
the topco of B and B becomes a subsidiary. The
equity of B goes to the assets of A on the
balance sheet. Company B does not disappear.
LEGAL: A+B=A and B
2. (statutory/simple?) Merger: The company A
absorbs company B and company B will
disappear. Company B has no control may be
very small while A has absolute control. (99%-
1% or 80%-20%)
LEGAL: A+B=A
Share operation
1. (Statutory) merger: sharing of a business, 60%-40% or
50%-50%. The two operations join each other but only
one of them continue to exist as a legal entity. B loses
its independent entity and begins to operate under the
name of A.
LEGAL: A+B=A
2. Consolidation merger: Converting the shares of
company A and B to those of a newly created company
C with an exchange ratio. We use a special purpose
vehicle (spv) which is company C.
LEGAL: A+B=C (TOPCO,SPV)
3. Partial merger (subsidiary merger): Merger with only a
part of a company like a merger between two
subsidiaries (C+D) of two top companies (A+B)
LEGAL (subsidiary): A+B=A and B

A B

C merger D

4. Some financial characteristics, this question can be mixed w the question of legal
classifications
i. Payments: Cash out, stocks or shares, others (how to pay the company?)
ii. Premiums: in control operations, average around 30%. (For control operations an avg of
30% more is paid over the value of the company, hence premium)
iii. Exchange Equation: also exchange ratio (How many stocks of the other company is
equal to one stock of ours)
iv. Company Vehicle: SPV, Vehicle, Topco, Newco... (Instrumental company/ subsidiary you
create for international operations)
v. Final stockholders share: control or participate (90%-10% means control, 50-50 or 60-40 share)
5. M&A based on business strategy; Diversification or business extension mergers.

Diversification mergers Business extension mergers

1. Horizontal merger :between companies
belonging to the same industry
2. Vertical merger: between companies that
produce different goods or offer different
services for one common finished product. The
companies operate at different levels in the
supply chain of the same industry.
(i) Backward Integration: A vertical
integration where a company acquires
the suppliers of its raw materials.
1. Market extension Merger
extension mergers usually involves two
companies that produce the same product or
service, while with product extension mergers,
the two companies that come together do not
produce the same product or service
2. Tech or Product Extension merger:
A congeneric merger is one that happens
between companies that are part of the
same industry but feature a different line of
products.congeneric or concentric

(ii) Forward Integration: A vertical

A concentric merger is where both
integration where a company acquires
businesses sell to the same customers, but
the distributon channels of its
they sell different products.
products.

3. Conglomeral: between companies that operate in

completely different and unrelated industries

6. 10 External growth objectives of classic or m&a operations

1. Eliminate competition: market power
2. Diversify activities
3. Internationalization and globalization
4. Acquisition of technology and intangibles
5. Entry into protected markets and sectors
6. Consolidation (making something stronger) of alliances
7. Enter the first stock market division: ibex 35, euro stoxx 50....
8. Structure, complement and restructure activities
9. Avoid other mergers and acquisitions
10. Subsidiaries and business fragmentation: mergers of subsidiaries

7. Advantages and disadvantages of M&A operations

M&A Advantages:
1. Synergies: Economies of scale, scope, experience, Knowledge, networking
2. Grow by the market (already have their developed products)
3. Acquisition of Technology, knowledge, brands…
4. Fast strategies: but it could be an inconvenience because organization time
5. Easy to finance: in shares, debt
 6. Can generate an increase of the market value: strategic value of the operation
7. Defend from possible takeovers and hostilities
8. Can enter first stock market index-indices
9. Internationalization of capitals

Disadvantages
1. They are not made with strictly economic criteria: political reasons
2. Companies do not merge with who they want, but with who they can
3. Manager wars for power
4. A strong defense is produced in the smallest or the acquired company
5. In the short term there is an increase in costs due to restructuring
6. The activity is paralyzed due to the integration: loss of the market
7. There are strong cultural problems: “cultural betrayal”
8. Paper inflation and capital losses due to premiums
9. High legal complexity
10. Difficulty of economic evaluation
11. Often there is decreases in value in stock market
12. Reduction of brands and total market share
13. Large funding needs to complete these processes

Alliances
8. General classifications of partnerships and cooperation agreements: ad hoc contracts,
standad contracts, hybrid and symbiosis, multi-agent models
(1) Ad hoc contracts and agreements: SLAs (Service Level Agreement), NDA (Non-
Disclosure Agreement), CA (Confidentiality Agreements), Exclusivity-
competition-concurrence agreements
(2) Standard Contracts : Agency, Franchises, Concessionaires (one who holds a concession or a
right granted for example, by the government to conduct a certain business quotations) , Branding and
flagging(Branding is done for services companies like consulting, legal services, like Deloitte, EY,
where companies from different countries must have a strong relationship, the contract states
the services that must be provided) , Management Contracts and other partnerships
(3) Hybrids and symbiosis: Joint Ventures, Stock Options, Temporary business
associations and consortiums
(4) Multi-agent models: Industrial and financial. Consortiums, Clusters, Leverage
Finance, Project Finance, etc
A service-level agreement (SLA) defines the level of service expected by a customer from a supplier, laying out the metrics by
which that service is measured, and the remedies or penalties,
if any, should the agreed-on service levels not be achieved. Usually, SLAs are between companies and external suppliers, but
they may also be between two departments within a company.

9. Objectives of cooperation agreements (at least the four different categories)

1. Knowledge transfer
o R&D in common
o Open window technological evolution
o technological complementarity
o Get know how
 o Fast access to new technologies
2. Improve competitiveness
o Cost reduction
o Scale economics
o Reduction of transaction costs risk reduction
o Risk reduction
3. Take opportunities
o Entering new markets
o Comply with national regulations
o Take advantage of institutional offers complementarity of activities
o Complementarity of activities
4. Competition structuring
o Establishment of standards
o Control the technological evolution defend the national industry
o Avoid other alliances

10. Hybrid symbiosis and multi-agent industrial operations

1) Consortium
2) Clusters (Michael Porter)
3) Entrepreneurship models: intra, extra and mix models
4) Urban Parks: evolution from industry parks, to business, tech and science parks
5) Prospecting groups: from mining and petrochemical to commercial prospecting
groups
6) Promotion Groups: International trade fairs, international quality labels (wines,
food…)
7) Industry associations and lobbies, Unions
8) Tech Industries association and development: eg Vertical, Sandbox
9) Corporate Ventures: the practice of directly investing corporate funds into external startup
companies.
Consortium
o It is sometimes regulated by Goverments laws (Administrative Right-Laws)
o In many cases, relates private or public companies with goverments
o It is used a lot for infrastructure: roads, tunnels and bridges, dams, airports, ports,
energy (power plants, wind-solar power stations, ..)
o The concept is extended to the integration of two or more companies in one value chain
o Partially coincides with the federal organizational models, multiorganizational alliances
o It is being extended to models on horizontal nodes, and multiple valuechains
o It is additionally used in R&D and production relationships
o The concept is extended to relationships between multiple companies with or without
relations with goverments
o Sometimes it ends in a build up (you make a big company by union of many small ones)

Clusters
o It is a not regulated figure, could be a combination
o Relates sectoral private companies, the goverments in its different levels, research centers
 and universities, multilateral banks, private banking, venture capital, real estate and urbanism,
other companies out of the industry
o Multi-agent systems with multiple value chains
o Circular and network organizational models
o Usually promoted by the Goverments in Europe, and sometimes sectorally spontaneous in
USA
o Normaly geographical or sectoral, sometimes international networks

11. Operations of financial symbiosis and business (Either all of them or only two of the
operations listed)
1. Private Equity: public is listed equity and private is unlisted equity.
2. Venture Capital: a form of private equity financing that is provided by venture capital firms or
funds to startups, early-stage, and emerging companies that have been deemed to have high
growth potential or which have demonstrated high growth risk and investment capital. It is a part
of private equity, but an independent financial industry has been created. Many investment
levels: rounds preA, A, B, C seed, late-seed, development, new business… many times related
with start ups. Smart money or not (management of the company)
3. Project Finance: Structured debt on liabilities. In the asset, development of an infrastructure
with or without tender (CAPEX), an intangible asset (biotech, nanotech, or IT, patent or escrow,
normally), in general any asset. Project finance is the long-term financing of infrastructure and
industrial projects based upon the projected cash flows. You make for example an SPV and to finance
a big project you have to carefully construct your liabilities. Use a lot of instruments to finance assets.
In the assets you have the royalty of the products (future cash flows, like highway tolls) of which you
will pay the liabilities.

Private equity:
1. It is, in a strict sense, the investment in shares of companies not listed on the stock markets
2. Extends to unlisted corporate bonds, typically linked to equity, such as
3. subordinated, convertible or non-convertible debt
4. It is currently linked to any business financing operation that is not a banking operation, which
generates higher returns than those obtained with traditional assets listed on organized
markets, with guarantees of capital or any internal or external investment asset.
5. Used with or without the aim of control
6. Structured transactions with or without financial transformation, with or without credit
enhancement, are often used
7. Normally involve financial operations: mergers and acquisitions, multiagent symbiosis
operations
8. It is being used to finance control packages (shares) of listed companies
9. Frequently, there are M&A operations by the directors of the companies (Leverage Buy Out)
10. Sometimes used in listed companies that suspend their listing (public to private operations) in
order to make changes that could not be done in regulated and heavily supervised markets
11. Good investment tool in companies in crisis due to liquidity reasons, poor financial structure or
excessive growth
12. Also used as a mechanism for restructuring and shareholding entry
13. Can be a pre-IPO or the signing of an important contract
14. Frequently are used to modify the capital structure, with hostile operations, forced departure of
shareholders, or family succession
Project Finance
1. It is an unregulated figure, normally using a company, a SPV
2. Liabilities and equity obtained through structured debt and funds: Institutional or non-
institutional, with or without public administration.
3. The assets are linked to an administrative concession, license, royalties, or other goods,
facilities or rights
4. Usually generates chains of contracts, joint ventures, and massive outsourcing in the asset,
integrating into other multiagent figures
5. Two levels of relationship: promotion and construction, and subsequent services
6. Multi-agent systems, traditionally related to an infrastructure
7. The promoters are usually the public administration and corporate banks
8. Also used for large real estate operations: like shopping malls, hotels and resorts, parks
9. Infrastructures: electrical and telco installations, hospitals, airports, etc.
10. It is extended as a basic methodology, even at a medium and small level of business
11. It is widely used as a spin-off and spin-out of large real estate companies, nationally and
internationally
12. It is used in businesses with estimated future cash Flow (tolls, megawatts,rentals…), with
reduction systems of risks and credit enhancement mechanisms, which make the investment
viable on minor risks and credit improvement
13. Usually used: Eurobonds, private and quasi-public capital structures, that allow the acquisition
by insurance companies and pension funds, underwriting of issues, syndicated loans, asset
securitization, convertible and subordinated debt (bonds)

12. Leveraged finance: for example name five leveraged finance related operations:
1. Generically, they can be leverage finance operations: purchase/aquisition of
2. credit assets
3. Venture capital: M&A, Leverage finance, funds. Many times with subordinated debt or
participating loans
4. Private Equity Funds: investment in unlisted companies
5. Build ups and Buy and Build: concentration of companies from one sector or several (Club
Deal)
6. Leverage buyout LBO: Management Buy-Out (MBO), Management Buy-In MBI,
7. BIMBO (by managers or control groups), EBO or LEBO (by employees), IBO
8. (institutional buy-out, by auction). Purchase by managers or control groups
9. Public to Private operations: buying a listed company and delisting it
10. Buy, Strip and Flip: usually buy for IPO, capital increase or short-term sale
11. Dual Track Process: when two investment strategies are established, two
12. paths, for example a section in the stock market with a PO and another through
13. investment capital.
14. Equity Carve Out: spin-off by splitting a subsidiary and create a new company with entry of
new shareholders (totally or partially, with or without internal Buy Out) or a joint venture.
15. Fundraising: like crowdfunding
16. Real estate operations: temporary purchase of financed assets to obtain capital gains
(Flipping)
17. Stock call/put options: with premium or with management (takeover), can be american or
European (exercised at expiry), etc