1. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-1 Chapter 11 Corporate Governance and the International Market for Corporate Control 11.1The Terminology of Mergers and Acquisitions 11.2The Role of Financial Markets and Institutions in Corporate Governance 11.3The International Market for Corporate Control 11.4Top Executive Turnover and Firm Performance 11.5A Recent History of Cross-Border M&A Activity 11.5The Evidence on Domestic Mergers and Acquisitions 11.7The International Evidence on Mergers and Acquisitions 11.8Summary

2. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-2 Corporate governance Corporate governance refers to the way in which major stakeholders exert control over the modern corporation. Three ways to obtain control over another firm’s assets: » acquisition of another firm’s assets » acquisition of another firm’s stock » merger or consolidation

3. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-3 A typology of corporate governance systems Systems dominated by prominent families or the State Indonesia Italy Mexico Saudi ArabiaSingaporeSpain Bank-based systems dominated by commercial banks GermanyJapanKorea Market-based systems dominated by financial markets United StatesUnited KingdomCanada AustraliaIreland

4. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-4 Major determinants of cross-border differences in corporate governance F The banking system »Family- or State-dominated financial systems Often the same - e.g., Indonesia, Mexico, Saudi Arabia »Bank-based systems dominated by commercial banks Continental Europe (in particular, Germany), Japan, Mexico »Market-based systems dominated by financial markets United States, United Kingdom, Canada, Hong Kong F Concentration of equity ownership »high in Continental Europe »low in the United States and the United Kingdom »concentrated within the keiretsu in Japan

5. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-5 Cross-border differences in the relative importance of commercial banking United States Japan Germany (market-based) (bank-based)(bank-based) Assets of 5 largest banks$1,463 billion$2,357 billion$1,823 billion GNP$8,080 billion$4,193 billion$2,035 billion Ratio of Assets/GNP18.1%56.2%89.6% Assets/GNP  3.104.95 relative to the U.S. Bank assets and GNP figures are from 1997. Bank values are from the July 1998 issue of The Banker (a Financial Times publication). GNP is from International Financial Statistics.

6. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-6 Institutional ownership of public corporations United StatesJapanGermany Largest automakerGeneral MotorsToyotaDaimler-Benz Largest institutional ownerState of MichiganSakura BankDeutsche Bank Percent owned by largest institutional owner1.4% 4.9% 41.8% Percent owned by five largest institutional owners5.7% 21.6% 78.4% From Mark J. Roe, “Some Differences in Corporate Structure in Germany, Japan, and the United States,” The Yale Law Journal, Vol. 102, pages 1927-2003.

7. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-7 Deutsche Bank’s equity ownership Non-banking companies in which Deutsche Bank owned 5% or more of share capital that was worth greater than DM100 million on Dec. 31, 1998. DB’s Market value Company share(DM millions) Daimler-Benz * 21.8% 14,152 * 12% after Chrysler merger Allianz9.410,448 Munich RE10.05,585 Linde10.1923 VEW6.3728 Heidelberger Zement10.1602 Metallgesellschaft13.0574 Nürnberger-Beteiligungs26.0566 Philipp Holzmann25.0509 Südzucker10.1442 Continental8.4389 Source: Deutsche Bank

8. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-8 Core members of the Mitsubishi keiretsu

9. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-9 Composition of the supervisory board F Bank-based corporate governance systems »GermanyOutside directors, bankers, and labor representatives »JapanInside managers, bankers, keiretsu members, and business partners F Market-based corporate governance systems »United StatesInside managers and outside directors

10. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-10 The role of banks in corporate governance F Bank-based corporate governance systems »GermanyShared control between the lead bank and the corporation »JapanCooperative with bank and other keiretsu members; bank intervenes only in financial distress F Market-based corporate governance systems »United StatesBy law, banks are not allowed an active voice in corporate governance

11. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-11 Commercial bank participation in equity markets F Bank-based corporate governance systems »GermanyUnlimited equity ownership; underwriting »JapanLimited equity ownership; limited underwriting F Market-based corporate governance systems »United StatesBanks prohibited from owning equity except in trust; trusts limited to passive 5% ownership of any firm

12. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-12 Hostile acquisitions F Bank-based corporate governance systems »GermanyRare; possible with the support of the lead bank and 75% of shareholders »JapanRare; blocked by equity share cross-holdings within keiretsu or with business partners F Market-based corporate governance systems »United StatesPossible through proxy contests and tender offers

13. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-13 Top executive turnover F Cross-border similarities »higher turnover in firms reporting poor earnings performance »higher turnover in firms suffering a sharp decline in equity value F Cross-border differences »Bank-based governance systems Turnover tends to be initiated by the lead bank (Germany) or by the principal shareholders (Japan). »Market-based governance systems Control contests held through proxy contests or directly in the marketplace through tender offers.

14. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-14 Number of M&As involving U.S. firms Compiled from Mergerstat and Mergers and Acquisitions, various issues.

15. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-15 Value of M&As involving U.S. Firms (in $ billions) Compiled from Mergerstat and Mergers and Acquisitions, various issues.

16. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-16 Mergers and acquisitions F M&A evidence from the U.S. »Target firms are the winners (bidding firms may or may not win) »Gains to acquiring firm shareholders are negatively related to free cash flow »Tax factors may also play a role F Related cross-border evidence »Both target and bidding firms tend to gain »Gains to acquiring firm shareholders are negatively related to profitability »Gains to US firms acquiring foreign targets appear to be sensitive to the tax environment

17. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-17 The benefits of multinationality Multinationality contributes to cross-border acquisitions in the following ways: F Multinationality increases the value of firm-specific, intangible assets F Multinationality increases the value of cross-border acquisitions in related businesses F Prior international experience increases the value of entry into new markets

18. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 11-18 Recent M&A in the banking industry F August 1995 - Chemical Banking Corp buys Chase Manhattan Bank for $11.4bn F January 1996 - Wells Fargo & Company buys First Interstate Bankcorp for $12.3bn F August 1996 - NationsBank Corp buys Boatmen’s Bankshares for $9.7bn F March 1997 - First Bank System buys U.S. Bankcorp for $9.1bn F August 1997 - NationsBank Corp buys Barnett Banks for $15.5bn F November 1998 - Deutsche Bank buys Bankers Trust for $9.7 billion.