Introduction Mergers and acquisitions immediately impact organizations with changes in ownership, in ideology, and eventually, in practice. There are multiple reasons, motives, economic forces and institutional factors that can, taken together or in isolation, influence corporate decisions to engage in mergers or acquisitions. The financial risks of merging with or acquiring an organization in another country and how those risks can be mitigated are important issues for corporations to conduct research on. This paper will examine the sensible and dubious reasons for mergers and acquisitions and the benefits and costs of the cash and stock transactions.
Mergers and Acquisitions According to Florida Incorporation, a merger is the statutory combination of two or more corporations in which one of the corporations survives and the other corporations cease to exist. An acquisition is obtaining control of another corporation by purchasing all or a majority of its outstanding shares, or by purchasing its assets (Florida Incorporation, 2006). According to Gilles McDougall, the reasons for mergers and acquisitions are numerous and include:· To diversify or expand markets;· To acquire particular production technologies;· To take advantage of work forces with particular skills; or· To benefit from "good opportunities" to take over a corporation.Over the last few years, the pressures emanating from international competition, financial innovation, economic growth and expansion, heightened political and economic integration, and technological change have all contributed to the increased pace of mergers and acquisitions. Cash and Stock TransactionsThere are several options available for companies looking to acquire a foreign company by means of a merger or an acquisition. One of the safest ways is for a company to acquire a business is to use cash in advance.
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Cash advance may be safer for the buyer, but getting the company at the other end to agree may be difficult, and the company might lose the sale. An Irrevocable Letter of Credit is a good option for both parties because it is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount (Week 5, 2006). According to the week five lecture, the U.S.
organization should select a major bank that has considerable experience with irrevocable letters of credit. The major bank handling the Irrevocable Letter of Credit can advise the least risky method of handling the transaction. The general idea is that funds are transferred from the foreign customer’s trusted financial institution to the organization’s bank once the terms of the letter of credit are met. An Irrevocable Letter of Credit is one financial instrument that can help organizations make sales to a foreign entity safely.
A few decades ago, some U.S. companies began to explore another takeover solution, namely partial or total acquisition of independent non-U.S. companies (Week 5, 2006). In this day, there are a significant percentage of merger and acquisition transactions, which are cross-border.
Even in combinations of two U.S. multinationals, the percentage of international business being incorporated can be a considerable economic portion of the total (Week 5, 2006).
Often, when specific patents, products, management teams, or non-financial strategic assets are located in another country, mergers and acquisitions present an efficient way to create economic value for shareholders. Simultaneously, market share can be increased and redundant administrative overhead can be eliminated through a combination of businesses and their assets. Often times, an acquisition is easier to accomplish than starting a new company in a foreign land.Foreign Business Risks Conducting business internationally can be a risky investment. Political risks, exchange rate risks, transaction risks, translation risks, and economic exposure are tendencies that international businesses have to deal with.
Foreign business risks can leave a company in ruins if the business does not research and protect itself. Political risk is the possibility of negative events such as expropriation of assets, changes in tax policy, expropriation for minimal compensation below market value, restrictions on the exchange of foreign currency, governmental controls in the foreign country, local governments requiring equity positions, or other changes in the business climate of a country. International business can lead to these types of political risks and studying the market can help to lessen the damage that can be done.