International Finance And Cross Border Merger And Acquisition Essay.

“In 2008, one of the most significant events in the automotive industry took place when Indian-based TATA Motors completed their acquisition of British luxury automotive company, Jaguar Land Rover in a deal worth an estimated US $2.3 Billion. This acquisition included all necessary intellectual property rights, manufacturing plants, two advanced design centers in the UK, a worldwide network of sales companies and more importantly adding these two luxury brands to a line-up that already includes the low-cost Nano.” (Reuters, 2008) 

In light of TATA Motors acquisition of Jaguar Land Rover, making use of extensive academic justifications and an in-depth research of the companies involved, answer the following questions:

Discuss the three common elements in the process of a cross border merger and acquisition and evaluate how this is reflected in TATA Motor’s acquisition of Jaguar Land Rover.

1. In light of TATA Group’s core purpose as a business of “improving the quality of life of the

communities it serves globally through long-term stakeholder value creation” (TATA, 2015), discuss and evaluate how this management goal is reflected in TATA Motors actions since their acquisition of Jaguar Land Rover.

1. Discuss and analyse the linkage between cost and availability of capital using TATA Motors as an example having raised finance internationally in being listed on the New York Stock Exchange (NYSE) for the last 10 years. 

“Crosswell International, a U.S.-based manufacturer and distributor of health care products has been approached by Material Hospitalar, a distributor of health care products throughout Brazil who are interested in distributing Crosswell’s diaper products. Considerable competition already exists in the Brazilian Market, so pricing and therefore cost control will be critical for the success of this collaboration.”

Case study of the core text book by Moffett, Stonehill and Eiteman (2014, p. 529)

Making use of extensive academic justifications and an in-depth analysis of the “Crosswell International and Brazil” case answer the following questions:

Discuss the exposure to currency risk that Crosswell International faces in its dealing with Material Hospitalar and examine the methods of hedging it could engage with to protect itself from this.

Discuss how the various stages and their costs impact the ability of Crosswell as an exporter in being competitive on the pricing of its products in penetrating the Brazilian market. 

Using an example of Croswell in Brazil, you are to discuss and apply management guidelines to minimize the costs of funding working capital requirements in trading with countries of different payment terms practices.

Role of International Finance in Mergers and Acquisitions

One of the most critical parts of commercial economics is International Finance. It evaluates the affairs related to monetary connections of two or more countries. International finance examines the subjects such as exchange rates of currencies, worldwide financial system, global monetary systems, foreign direct investment (FDI), and other vital topics relating to international financial management. An international finance system aids in preserving peace between the countries (Eichengreen 1995). It is an illustrious indisputable fact that countries usually borrow from one another.

In such trades, several countries use their own currencies; therefore a system for comparing the currency is required. This file will discuss the case study of the acquisition of ‘Jaguar Land Rover’ by ‘Tata Motors’, as an example for understanding the part of international finance in a merger or acquisition between the corporation of different countries. Further, the report will discuss the elements of cross border merger and acquisition, and impact of obtaining ‘Jaguar Land Rover’, above the organisation objectives of ‘Tata Motors’.

International Investment is a method of including worldwide financial instruments, in a corporation’s portfolio. Investment options such as Global Depository Receipts, American Depository Receipts, mutual funds or direct investments, includes in International investment. The reason for companies to invest internationally is to diversify or spread the investment risk amongst the foreign market or companies. Any exchange of goods, services or capital between the international boundaries is known as International Trade. The International Investment and Trade are key components of economic progress and expansion, and essential for the success of corporations. This report will discuss the case study of ‘Crosswell International’, to identify the techniques of securing an investment by utilizing the methods of hedging and examine the steps taken by the management of Crosswell for succeeding in the market of Brazil.

Cross Border Merger and Acquisition 

A merger is an intentional consolidation between two or more corporations to create a new legal entity. In other words, when two or more companies come together to form one large company, it is called merger. The shareholders of old companies transfer into the owners of the new company and the new company operates under the same management. An acquisition is a corporate act of purchasing another, generally smaller, corporation. In other words, when a company takes the directing power of another company, it is called acquisition. A company has to obtain more than 50 percent of shareholding in another company, for its acquisition (Levi 2007).

The agreement between overseas companies and local companies of a country are known as a cross body merger and acquisition. The agreement integrates the assets and liabilities of domestic companies to the foreign companies and creates a new legal entity. The number of international merger and acquisition has increased significantly due to the globalization of the economy. The international merger and acquisition have augmented nearly 200 percent in the Asian region during the 1990s. This era has been known as the ‘golden decade’ for merger and acquisition. The benefits of global merger and acquisition for the companies are globalization the financial markets, to find new projects, increasing the efficiency of production or diversification of business (Obstfeld 2009).

TATA Motors Acquisition of Jaguar Land Rover

Common Elements in Process of Cross Border Merger and Acquisition

In the course of merger and acquisition between corporations of different countries, there are three fundamentals: a) Recognition and Assessment of the goal; b) the tender and the settlement of the transaction; and c) the supervision of transformation after the acquisition.

1) Recognition and Assessment of the goal

For recognition of the beneficial targets, planning and focus by the top management of the company are required. Firstly, the management requires recognising the most beneficial market for them. There are a vast number of trading companies and availability of financial data, in a developed market. The management of the company should hire the experts for their advice, while making the list of potential companies. The operating of commercial data of companies must be thoroughly evaluated, before ranking them (Shimizu 2004).

The management could use various popular methods of evaluating the organization. Each of these methods has their own advantage. The most commonly used methods for evaluation are the discounted cash flow, multiples method, comparable transition method, and market valuation method. The price earnings ratio could identify the company’s paying capacity for the currency part of earning. To find the trust of customers in the company’s value over the capital stock and future profits, the market to book ratio could be used by the management (Nocke 2007).

2) The Tender and the Settlement of the Transaction 

The procedure of acquiring the consent of management and the shareholders of the company starts after the company fixes a target for acquisition. The procedure of getting the consent is both time-consuming and difficult. The management of acquiring company express their proposal to the directors of other company. If the directors support the proposal of acquiring company; they could recommend the shareholders of company to accept the terms of the tender. The shareholder of the company could oppose the offer of acquiring the company, the reason for such opposition could be the price offered by the company or any other factor (Erel 2012).

In another case, when the directors do not accept the terms of offer proposed by acquiring company, the company could choose a different approach called a ‘hostile takeover’. The company could directly approach the shareholders of the company with the offer for buying their shares. In a hostile takeover, the company could make the tender offer public, and the directors of the company could recommend their shareholders to reject the offer. It is the choice of shareholders to accept or decline the offer of acquisition (Chen 2010).

3) The Supervision of Transformation after the Acquisition

This is the most important stage of acquisition because it concludes whether the acquisition was a success or a failure. If the management of company does not carefully manage the transactions after the acquisition, it could have a negative impact on the whole deal. Due to the merger of management, the company faces new problems. There could be a clash of the cultures of both companies. After the acquisition, if the target company did not perform in the market, its value decreased in the eyes of the public (Bjorvatn 2004).

Common Elements in Cross Border Mergers and Acquisitions

Analysis of the Acquisition by Tata Motors 

Tata motors are an Indian incorporated company working in designing and manufacturing of vehicles and it is a part of Tata groups. In 2008, for a $2.3 billion deal with Ford motor company, Jaguar and Land Rover businesses were purchased by Tata motors. Jaguar and Land Rover Company execute the work of designing, manufacturing and selling luxury vehicles. Tata motors acquire all the rights of intellectual properties, industrial factories, two design workshops in the United Kingdom and a global system of sales operations (Reuters 2008). Tata motors decided to acquire Jaguar and Land Rover because they were significantly popular brand in the United Kingdom. Ford motors were facing insolvency in 2008, due to negative market conditions and high manufacturing cost of producing vehicles in the United Kingdom (Bruche 2010).

Tata motors applied the general principles of cross border acquisition in their transaction with Ford. They recognised the opportunity of purchasing Jaguar Land Rover and extended their offer to Ford motors for acquisition (Mitra 2011). The decision of buying Jaguar Land Rover was evaluated by Tata motors and following were the advantages and disadvantages of acquisition:

Advantages

1. Opportunity to enter the market of high-end luxury vehicles.
2. Increase company’s global footprint by entering into European and American automobile market.
3. Diversification of company’s customers and market.
4. Access to latest technology in automobile industry.
5. Ability to raise the quality of company’s products in domestic markets with the help of design workshops (Kumar 2008).
6. Rapid change in the market of automobiles
7. Strong competition from foreign companies like BMW, Lexus, Audi and Mercedes.
8. The image of Jaguar Land Rover was declining.
9. An automobile giant company was not being able to maintain the company.
10. The risk of investing in the company was significantly higher.
11. The inexperience of Tata motors to handle a luxury brand (Madhok 2012).

Eventually, Tata motors decided to take the risk and offer to purchase Jaguar Land Rover from Ford for $2.3 billion. The management of Ford decided to accept the offer. After the acquisition, many market experts believe this was a big mistake from Tata motor’s perspective. But due to solid management planning and support the cultures of both company does not collide. The changes after the acquisition handled positively by the management.

Impact of Acquisition on the Organization Objectives

The organization objectives of Tata motors are to increases life standards of the societies they assist worldwide, by expanding the worth of collaborator of the company. The acquisition of Jaguar Land Rover was a high-risk investment from Tata motor’s perspective. Many market experts were predicting the loss of Tata motors in their investment. But instead, the business of Jaguar Land Rover started to progress after their acquisition.

In the financial year 2010-11, the company has published 27 percent growth in trades, selling up to 306,000 automobiles. The company has amounted more than 50 percent of revenues of Tata motors. With the launch of newly designed versions of Range Rover and F-type, the company’s sales are expected to grow further (Bajaj 2012).

The decision for the takeover of Jaguar Land Rover was not appearing beneficial for the company in the beginning. The demand for high-end vehicles decreased after the financial crisis in North America and Europe, right after the takeover of the company. Tata motors acquired a debt of $3 billion for the takeover of the company, and after that Tata was required to bring more money in the corporation. Several market experts suggested that company has paid more money for the takeover deal and this will affect the company’s future profits.

Despite the criticism, Tata motors have successfully profited from the takeover of Jaguar Land Rover Company. The company has fulfilled their business objective by bringing high-end cars of Jaguar Land Rover in the Indian markets. The revenue collected by the company, eventually increased the capital value of shareholders in Tata motors and helped in gaining a significant amount of profit. The takeover diversified the customers in automobile market for Tata motors and expands their footprint in Europe and North America.

Exposure to Currency Risk and Hedging for Crosswell International

Currency Risk in International Investment

The case study of “Crosswell International and Brazil” is a substantial illustration for understanding the risk of changing the value of the currency, while investing in the global companies. The globalisation has increased the number of foreign investments. It is not limited to the large organisation, but small and medium corporations are investing their capital in foreign ventures as well. The investment in global companies raised the exchange rate risks because the deal denominated in foreign currency. There are various market factors that could adversely affect the currency rates of a country (Saunders 2003). The ‘Crosswell International and Brazil’ case is a significant example for understanding the exchange rate risk in foreign investment.

Crosswell international has a business of producing health care products, including diapers for children, operating in the United States. The Crosswell approached by the president of ‘Material Hospitalar’ company. They work in the business of distributing health care products in Brazil. The company was interested in distributing the children’s diapers produced by Crosswell called ‘Precious Ultra-Thin Diaper’, throughout Brazil, if both the companies reached a satisfactory agreement (Moffett 2014).

Following were the risks facing by Crosswell International in their transaction with the Material Hospitalar Company:

• The company faces the risk of changing in exchange rates between countries. The currency exchange rates changes due to various market factor. The amount of agreement denominated in foreign currency. The change in the exchange rate could adversely affect the value of deal between both the companies (Czinkota 2011). The risk increases in case when the time between contract and payment is long. In the case of Crosswell, the possibility of US dollar exchange rate to remain same was significantly low.
• The change in exchange rate risks the value of future income and future costs of the company. The company was entering in agreement for a long period and the stability of US dollar rate for such period was considerably low. The US dollar was growing rapidly compared to the Brazilian Real (Brazil’s currency), increasing the risk for declining in the value of the contract (Kern 2011).
• The impact of the change in exchange rate affects the net value of assets and liabilities of the company. In the balance sheet of the company assets and liabilities denominated in foreign currency, therefore while preparing a consolidated balance sheet the change in exchange rate affects the value of assets and liabilities.

Method of Hedging

The company can protect itself from currency risk by implementing the methods of hedging. The method of hedging partly eliminates the risks faced by the company due to change in exchange rates of currency. A hedge is an instrument for companies to invest and it derives its value from underlying assets. There is two usual hedging instrument uses by companies: forward contracts and options (Gerhard 2005).

In forward contracts, the company fixes the exchange rate in which the agreement will take place in the future. In other words, the company fixes an exchange rate for the contract, making sure that change in future exchange rate does not affect the value of the contract.

An option contract lets companies decide an exchange rate, in which they might choose to exchange currencies. The company has right to select between the fixed exchange rate and the prevailing exchange rate, for payment of the amount of agreement (Lien 2001).

In the case of ‘Crosswell International’, the company could use hedging to eliminate their risk of change in exchange rates. The simplest method is to invest in hedges assets by the company, such as Exchange-traded funds. There are various options for companies to choose between different hedge assets in the market. The company can evaluate between various options before selecting the right option for them. Following are the instruments available for companies to select for hedging their currency risk (Hull 2006):

1. Forwards: This instrument help company to hedge the risk of change in currency. Crosswell International Company has a risk due to decline in the value of Brazilian currency against US dollar; therefore companies could enter into a forward contract, fixing an exchange rate in advance for the contract amount.
2. Futures: This is a significantly popular method of hedging because the parties have to pay a significantly small amount as margin. The disadvantage of this method is that companies cannot customize it according to their needs because these instruments are available for fixed dates.
3. ETFs: Exchange Traded Funds are not generally used by the companies for hedging risk of large amount, but instead this method is used by individual businesses to hedge their smaller currency risks (Marshall 2004).
4. Options: This instrument typically used by individual businesses, providing them the choice to buy or sell a particular currency for a fixed amount before its termination (Spinler 2003).

Factors Affecting Price of Product

Crosswell International produced health care products and was situated in the United States. The president of Material Hospitalar approaches the management to sell their children diapers in Brazil. The main competition of Crosswell were the multinational companies producing their products in Brazil, the domestic companies, companies exporting their products from Argentina and the companies from various countries such as Japan, Italy, France and the United States. The company has to price their products carefully in order for selling their product in the market (Craig 2005).

Expanding into the Brazilian Market

Crosswell estimated the price for diapers at R$ 92.21 and the Hospitalar estimation was R$ 83.00 (R$ being the sign for Brazilian Real). In order to succeed in market Crosswell has to either decrease their price or convince customers regarding the advantages of their products, which was a time consuming process. The management of Crosswell decided to decrease their price by 3.75 percent to price their diapers for R$ 83.00. The company decided to retain 16.8 percent margin through the process of interest offset in contradiction of their exchange rate risks (Figure 1). In the general conditions, Crosswell will earn 62 percent more profit in their business due to this model of business (Figure 2) (Moffett 2001).

The company faces many risks because the Brazilian interest rates could decrease considerably due to economic factors. The company has to monitor the interest rates, at least weekly. But the risks of the company paid off and the product ‘Ultra-Thin Diaper’ of the company received success in the Brazilian market.

Conclusion 

In cross border merger and acquisition, principles of international finance played an important role. The case study of the acquisition of Jaguar Land Rover by Tata motor is a substantial illustration of understanding the role of international finance in company’s growth. The acquisition played a significant role on in growth and development of Tata motors, amounting to more than 50 percent of their profits, and increased their footprint in the high-end vehicle’s market of Europe and North America.

The case study of Crosswell International is a significant case in the subject of international trade. Crosswell an American company, decided to enter the children’s diaper market of Brazil. In beginning, the company experienced many difficulties, but due to their management skills, they were able to succeed in the Brazilian market. It is an important case to recognize the principles that companies could follow in order to succeed in foreign markets.

References 

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