The Effects and Development of Takeover and Reverse Takeover for Multinational Firms

by

Table of Contents

CHAPTER 2: LITERATURE REVIEW1

Mergers1

Acquisitions or Takeovers1

Greenfield Vs Acquisition1

Transaction cost theory2

M&A Theory4

Theory of Operating Synergies4

Theory of Efficiency increase / Restructuring5

Theories of Agency Problem6

Theory of Financial Synergies6

Exporting, Licensing, And Multinationality7

Exporting7

Licensing8

Multinationality9

Different Types of Takeover10

Cross-border Acquisitions10

Leveraged Buyout (LBO)12

Share Acquisition14

Stock Acquisition (Merger and tender offer)14

Reverse Takeover16

Friendly and Hostile takeover16

REFERENCES19

CHAPTER 2: LITERATURE REVIEW

Mergers

Merger is a formal process of two or more firms getting into a union to form into a single entity for the assets and liabilities transferred by the selling firm and absorbed by the buying firm. In mergers shares transferred (Wanderer, 2008).

Acquisitions or Takeovers

Takeovers or Acquisition occur between the target organization and the bidding organization. There might be friendly or else hostile takeovers (Bruno and Karliner, 2002). In the act of acquisition, the bidder company might purchase the assets or the shares of the company which is targeted.

Greenfield Vs Acquisition

Wholly owned subsidiaries (WOS) include a Greenfield or acquired subsidiary in which one partner possessed more than 95% of its equity). Greenfield investment means that a foreign firm starts operations on its own in a host country and invests the necessary resources and capabilities to create new capacity/supply in a particular industry. In acquisitions, the foreign firm merges with or acquires an established business in the host country. Acquisition does not create new industry capacity and does not increase industry supply, as do Greenfield investments (DePamphilis, 2009).

Transaction cost theory

Without friction in the distribution system, operational efficiency should be recognized. An integrated airline agency, Orbitz, has an unfair advantage by producing goods internally. Naturally, production costs must be cheaper than those whose distribution is heavily dependent on travel agencies or GDSs. However, production costs should not be treated the same as transaction costs. Transaction costs are “costs of running the economic system” (Colcera, 2007) or “actual and opportunity costs of transacting under various governance structures” (Gilpin, 2002). In economics and related disciplines, transaction cost is a cost incurred in making an economic exchange (Hunt, 2009). Whenever a good or service is transferred from a producer to a user, transaction costs occur. Transactions can be internal or external to an organization. Costs associated with transactions depend on the governance structure (or, the organization of transactions affects transaction costs) (Williamson, 1989). Economists assume that firms always choose transactions that minimize coordination costs. Under this assumption, transaction costs are no different from production costs. Williamson emphasizes that production costs are similar to the cost of building and running an “ideal machine” (i.e., no market failures). ToWilliamson, transaction costs can be treated as friction which is incurred from perfection (Gaughan, 2007).

The ideal machine can be regarded as a perfectly efficient market. TCE investigates functions of a firm or a market from an efficient contracting and/or comparative organizational perspective which is different from that of neoclassical firm as a production function. Straub (2007) argues that the neoclassical identification of the firm with the production function was challenged by DePamphilis (2008) transaction cost view of the “firm as a ...