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Chapter 15

International Corporate
Governance and Control

1
International Corporate
Governance

Forms of governance of MNCs:


 Governance by Board Members
 Governance by Institutional Investors
 Governance by Shareholders Activity

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International
Corporate Control
 Decisions made by managers to serve
themselves rather than shareholders.
 International Acquisitions Activities.
 Barriers to International Control
 Anti-takeover amendments implemented
by target
 Poison pills implemented by target
 Host government barriers

3
International
Corporate Control (cont.)
 Model for valuing a foreign target

4
International
Corporate Control (cont.)

5
Factors That Affect the Expected
Cash Flows of the Foreign Target

 Target-Specific Factors
 Target’s previous cash flows
 Managerial talent of the target

 Country-Specific Factors
 Target’s local economic conditions
 Target’s local political conditions
 Target’s industry conditions
 Target’s currency conditions
 Target’s local stock market conditions
 Taxes applicable to the target

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Valuation Process

 International screening process

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Valuation Process (cont.)
 Estimating the Target’s Value
By measuring target’s expected cash flows that can
be determined by:
 Revenue
 Expenses
 Earnings and cash flows
 Cash flows to parent
Then:
 Estimating the target’s future sales price
 Valuing the target based on estimated cash
flows
 Sources of uncertainty
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Valuation Process (cont.)

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Valuation Process (cont.)
 Changes in Valuation over Time
Caused by:
 Impact of stock market conditions
 Impact of stock market conditions on the
value of private firms
 Impact of exchange rates
 Combines stock market and exchange rate
effects
 Impact of market anticipating regarding the
target
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Valuations of Target May Vary
among MNCs

Key determinants of a target’s


valuation:
 Estimated cash flows of the foreign
target.
 Exchange rate effects on funds remitted.
 Required return of acquirer.

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Other Types of MNC Restructuring

 International Partial Acquisitions


 International Acquisitions of
Privatized Businesses
 International Alliances
 International Divestitures

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Other Types of MNC Restructuring
(cont.)

13
Restructuring decisions as Real
Options

 Call Option on real Assets


It represents a proposed project that
contains an option of pursuing an
additional venture.
 Put Option on Real Assets
It represents a proposed project that
contains an option of divesting part or all
of the project.

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