International Financial Management

Abridged 10th Edition

by Jeff Madura

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 15
International Corporate Governance
and Control
Chapter Objectives
This chapter will:
A. Describe the common forms of corporate governance by MNCs
B. Provide a background on how MNC’s use corporate control as a form
of governance
C. Explain the motives, barriers, and valuation process in international
corporate control
D. Identify the factors that are considered when valuing a foreign target
E. Explain why valuations of a target firm vary among MNCs that
consider corporate control strategies
F. Identify other types of international corporate control actions

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 International Corporate Governance

1. Governance by board members

2. Governance by institutional investors
3. Governance by shareholder activists

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 International Corporate Control

1. Market for corporate control

a. If managers make decisions that destroy value, the MNC
could be subject to takeover and managers could lose their
jobs.
b. Market for corporate control is a means for MNCs to achieve
expansion goals
2. Motives for International Acquisitions
a. Comparative advantage
b. Better form of direct foreign investment
3. Trends in International Acquisitions

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 Model for Valuing a Foreign Target

n CFa ,t SVa
NPV a = − IOa +  +
t =1 (1 + k )t (1 + k ) n
where
IOa = initial outlay needed to acquire target
CFa ,t = cash flow generated by target
k = required rate of return on acquisitio n
SVa = salvage value of target
n = time when the target will be sold by acquirer

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 Model for Valuing a Foreign Target

1. Estimating the initial outlay

2. Estimating the cash flows
3. Estimating the NPV
4. Impact of the SOX Act on the valuation of the target

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 Factors Affecting Target Valuation

1. Target-Specific Factors
a. Target’s previous cash flows
b. Managerial talent of the target

2. Country-Specific Factors
a. Target’s local economic conditions
b. Target’s local political conditions
c. Target’s industry conditions
d. Target’s currency conditions
e. Target’s local stock market conditions
f. Taxes applicable to the target

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Example of the Valuation Process:
Exhibit 15.2 Valuation of Canadian Target Based on
Assumptions Provided (in Millions of Dollars)

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Example of the Valuation Process:
Sources of Uncertainty
1. Growth rate of revenue is subject to uncertainty
2. Cost of goods sold could exceed assumed level
3. Selling and administrative expenses could exceed
assumptions
4. Corporate tax rate could increase
5. Exchange rate may be weaker than expected
6. Estimated selling price of target in future may be
incorrect.

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 Changes in Valuation Over Time

1. Impact of stock market conditions

2. Impact of credit availability
3. Impact of exchange rates
4. Impact of market anticipation regarding the target

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 Other Corporate Control Decisions

1. International partial acquisitions

2. International acquisitions of privatized businesses:
difficulties due to:
a. Future cash flows are uncertain due to introduction of
competition.
b. Data regarding value and benchmarks are limited
c. Uncertain economic conditions in transitional economies
d. Volatile political conditions
e. Potential conflict between government control and acquirers.

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 Control Decisions as Real Options

1. Implicit options on real assets such as buildings,

machinery, and other assets.
2. Call option on real assets represents a proposed
project that contains an option of pursuing an
additional venture.
3. Put option on real assets represents a proposed project
that contains an option of divesting part or all of the
project.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.