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Kathmandu University School of

Management

Assignment 3

Merger & Acquisitions

Submitted To

Mr. Jayakar Vaidya

Course Instructor

Global Business Management

Submitted By

Shrizana Shrestha

12133

July 17, 2013

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1. Go through the internet and try to identify at least three reasons why global FDI hasdeclined in 2012.

In 2012, global foreign direct investment (FDI) inflows declined by 18 percent to US $1.35

trillion. According to surveys conducted, this decline has fallen below the economic crisis

level. Many speculations have been raised for the reason of this decline but factors like

political instability faced by investors, macroeconomic fragility, financial crisis and structural

weaknesses in the global financial system have been identified as the main reasons that have

caused this decline in FDI flows.

i. Global economic slowdownThe global Recession of 2008-2012 began in December 2007 and took a sharp downward

turn in September 2008. It has affected the entire world economy and can be considered as

one of the main reasons behind the decline in global FDI. The financial crisis with its

associated credit crunch has affected the ability of emerging market firms to invest abroad.

The crisis has led to liquidity constraints for transnational companies worldwide as access to

credit has tightened and corporate balance sheets have deteriorated. In particular, the capacity

of firms to finance mergers & acquisitions and Greenfield investments has declined sharply.

Developed countries including the US and some European countries began shifting their

focus to the real economy, as evidenced by the new re-industrialization in the US. Due to

the steep decline in cross-border mergers & acquisitions and backflow of the foreign capital

to its home countries during the time of recession, global FDI dropped.

ii. Political instability faced by investorsThe instability and uncertainty regarding global economy among investors has hampered

global FDI in a significant manner. This uncertainty is driven by a weakening

macroeconomic environment with lower growth rates for GDP, trade, capital formation and

employment, and by a number of perceived risk factors in the policy environment, related to

the Eurozone crisis, the United States fiscal cliff, changes of government in a number of

major economies in 2012, and broad-based policy changes with implications for FDI.

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iii. Fluctuations in exchange rates and monetary conditionsChanges in monetary conditions and exchange rates in a country would directly affect

investment decisions in that country. Investment requires a stable economic environment

whereas currency fluctuations create uncertainty which would discourage investors to invest

their money and these factors hence cause global FDI to decline further.

Similarly, lackluster economic growth in Europe, Japan and Brazil, much slower growth in

China, political instability in the Middle East, and policy uncertainty in the US all negatively

impacted the global FDI market. The extreme case was in Syria, with a decline of more than

90% in FDI projects in 2012. Natural disasters like earthquake, tsunami and nuclear disaster

in Japan and flooding in Thailand also contributed to negatively impact FDI in these

countries.

2. Find out at least three reasons why FDI inflows to developing nations are on increasingtrend?

Although the global FDI has been in a declining trend, FDI inflows to developing nations are

increasing. For the first time ever, developing economies absorbed more FDI than developed

countries, accounting to 52% of global FDI flows. Among developing regions, flows to Asia

and to Latin America and the Carribean remained significantly higher accounting for three

quarters of the developing-country total. The main reasons in this increase in inflows in

developing countries are:

i. Low labor cost in developing countriesDue to low labor cost in developing countries, investors are more inclined towards investing

in capital ventures in these developing nations rather than developed nations. The low labor

cost in these nations act as a competitive advantage to these nations giving more

opportunities to the foreign investments. The unique blend of factors in these nations

influences success and profitability of investments.

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ii. Policy framework of developing countriesVarious forms of tax related incentives and policies in developing nations has attracted

investments in these developing nations and encouraged companies to make huge

investments in countries like India, Brazil and other developing nations. Similarly, the

purchasing power of people in these developing nations has increased with the span of time

and this has attracted companies to take advantage of the developing market.

iii. Decline of political turmoil in African countriesAfter the decline of political turmoil in North Africa in 2011, FDI flows to North Africa

increased by 35% in 2012. The investments increased to serve Africas growing consumer

markets and extractive industries. Similarly, natural and energy resources continue to attract

investment from mining transnational corporations (TNCs). Recently discovered gas reserves

in Tanzania and oil fields in Uganda drew increased FDI to East Africa.

3. Find out two examples of the cross country acquisitions.i. Microsoft-Skype AcquisitionMicrosoft Corporation, founded by Bill Gates and Paul Allen is an American multinational

software company headquartered in Redmond, Washington that develops, manufactures,

licenses and supports a wide range of products and services related to computing. It is the

worlds largest software maker measured by revenues and one of the worlds most valuable

companies. The company is said to be worth $247.2 billion.

Skype Technologies, on the other hand is an Internet communications company founded in

2003 which developed and operates the voice communication service called Skype. Its

headquarters is situated in Luxembourg City, Luxembourg. It has since made impressive

progress, developing new products and revenue streams, strategic acquisitions and acquiring

intellectual property powering its peer-to-peer network. The company was worth $740 US

million as reported in 2009.

On May 10, 2011, Microsoft acquired Skype for $8.5 billion. It was announced that Skype

will operate as a new business division within Microsoft, with Skypes former CEO Tony

Bates reporting to Microsofts CEO Steve Ballmer. It was a friendly takeover and one of the

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most expensive buyouts by Microsoft. After the acquisition, both companies have agreed to

remain focused on their shared goal of connecting all people across all devices and

accelerating each others efforts to transform real-time communications for consumers and

enterprise customers. In the long term, Skype is expected to be integrated across an array of

Microsofts products.

ii. Tata Corus acquisitionTata Steel is the worlds 56

thlargest steel company based in Jamshedpur, Jharkhand, India. It

is a part of Tata Group of companies and has an annual crude steel capacity of 3.8 million

tonnes. Corus Group was an Anglo-Dutch steel manufacturing company that was formed

from the merger of Koninklijke Hoogovens and British Steel on October 1999. It was

headquartered in London, United Kingdom.

On January 2007, Tata Steel acquired Corus Group for $7.6 billion. It purchased 100% stake

in the Corus Group that led Tata Steel to be the worlds fifth-largest steel group. Tata Steel

was a low cost steel producer in fast developing region of the world whereas Corus was a

high value product manufacturer in the region of world demanding value products.

Acquisition of Corus hence led Tata to be one of the lowest cost steel producers in the world.

After the acquisition, Corus changed its name to Tata Steel Europe and adopted the Tata

Corporate Identity in September 2010.

4. Find out two examples of cross country mergersi. Softbank-Sprint mergerSoftbank Corp is a Japanese telecommunications company with operations in broadband,

fixed-line telecommunications, e-Commerce and other businesses. It was established in

Tokyo, Japan in 1981 and has a market capitalization of approx. US $43.52 billion.

Sprint Nextel Corporation is an American telecommunication company and a major global

Internet carrier providing wireless services. Its headquarters is located in Overland Park,

Kansas. It offers a comprehensive range of wireless and wire line communications services

including the first wireless 4G service, leading brands like Virgin Mobile USA, Boost

Mobile, etc. The company is worth US $35.3 billion.

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On July 10, 2013 Softbank purchased around 72% of current Sprint shares for approx. $21.6

billion. Sprint Nextel will now be called Sprint Corporation. The transaction was approved

by Sprint shareholders at a special meeting of shareholders. Sprint, which had been

struggling under a huge debt load and in a duopolistic industry hugely dominated by Verizon

and AT&T will now get a back support from Softbank. Since the merger took place recently,

it has not taken any such big steps but the merger has been widely speculated as a winning

move and both companies are expected to profit and grow more after the merger.

ii. Royal Dutch Shell Public Limited Company (Shell)Royal Dutch Shell is an Anglo-Dutch multinational oil and gas company incorporated in the

United Kingdom and headquartered in the Netherlands. It was created by the merger of two

rival companies - Royal Dutch Petroleum (based in Netherlands) and Shell Transport &

Trading (based in United Kingdom). It is expert in exploration and production, refining,

distribution and marketing of petroleum products and petrochemicals.

Royal Dutch Petroleum was a Dutch company founded in 1890 mainly for oil exploration

and production business. Shell Transport & Trading was on the other hand a British company

founded in 1897 which used to transport oil. The merger took place in 1907 mainly to

compete globally with the then dominant American petroleum company, John D.

Rockefellers Standard Oil. Royal Dutch Shell is now the worlds largest company in terms

of revenue in oil and gas industry.