Multinational Finance

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Chapter 18Corporate Governance and the
International Market for Corporate Control
Learning objectives ? National systems of
corporate governance Corporate governance
systems Cross-border differences ? Corporate
control and cross-border MA Activity Privat
izations The winners and losers Executive
turnover and firm performance
Butler, Multinational Finance, 4e
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Corporate governance

• Corporate governance refers to the way in which
  stakeholders exert control over the corporation
• There are 3 ways to obtain control over another
  firms assets
• Acquisition of assets
• Acquisition of stock
• Merger or consolidation
• Mergers and acquisitions are becoming
  increasingly important

Corporate governance systems
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Investment-based entry

International joint ventures
Mergers and acquisitions
FDI plant expansions
FDI new investment
Source Ernst Young
Corporate governance systems
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Corporate governance systems

• Market-based
• Australia Canada Ireland
• U.K. U.S.
• Bank-based
• Germany Japan
• Families or the State
• Family/State Indonesia S. Korea Saudi Arabia
• Family Mexico Italy Spain
• State China N. Korea Singapore

Corporate governance systems
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Corporate governance systems

• Country Equity Equity Supervisory Hostile
• concen- ownership board acquisitions
• tration by banks
• Germany High - lead Unlimited Outside
  directors, Rare - approval
• bank equity bankers, of lead bank and
• ownership labor reps 75 of shares
• Japan High - Limited Inside managers, Rare -
  blocked by
• main bank equity bankers, keiretsu
  cross-holdings
• keiretsu or ownership members, with keiretsu
• business (5 max) business or business
• partners partners partners

Corporate governance systems
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Corporate governance systems
Corporate governance systems
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Commercial banking in the U.S.

• The Glass-Steagall Banking Act of 1933 prohibited
  banks from most equity-related activities i.e.,
  owning stock for their own account, voting shares
  held in trust, investment banking, equity market
  making, and brokerage activities
• The Gramm-Leach-Bliley Financial Services
  Modernization Act of 1999 repealed Glass-Steagall
  separation of
• Commercial banking
• Investment banking
• Insurance
• Brokerage

Corporate governance systems
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Universal banking in Germany

• German banks offer a wide range of financial
  services, including
• Commercial banking
• Investment banking
• Insurance
• Brokerage

Corporate governance systems
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Japanese keiretsu

• Types
• Horizontal keiretsu
• Vertical keiretsu
• Characteristics
• Extensive share cross-holdings
• Personnel swaps
• Strategic coordination
• Commercial transactions

Corporate governance systems
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Mitsubishis horizontal keiretsu
Mitsubishi Heavy Industries
Mitsubishi Corporation
Bank of Tokyo-Mitsubishi UFJ
Automotive Mitsubishi Fuso Truck Bus
Mitsubishi Motors Shin Caterpillar Mitsubishi
Finance insurance DC Card Diamond Lease
Meiji Life Mitsubishi Auto Credit Mitsubishi
Securities Mitsubishi Trust Banking Tokio
Marine and Fire
Industrial equipment Mitsubishi Electric
Mitsubishi Kakoki Mitsubishi Precision Toyo
Engineering Work
Electronics telecom IT Frontier Mitsubishi
Research Inst Mitsubishi Space Software Nikon
Space Communications
Industrial materials Asahi Glass Dai Nippon
Toryu Mitsubishi Aluminum Mitsubishi Cable
Indus Mitsubishi Materials Mitsubishi Plastics
Mitsubishi Rayon Mitsubishi Shindoh Mitsubishi
Steel
Transportation dist Mitsubishi Logistics
Mitsubishi One Transport NYK Line
Resources energy Nippon Oil Mitsubishi
LPG Mitsubishi Nuclear Fuel Mitsubishi Paper
Mills
Chemical pharmaceutical Dai Nippon Toryu
Mitsubishi Chemical Mitsubishi Gas Chemical
Mitsubishi Petrochemical
Consumer goods foods Kirin Beverage Kirin
Brewery Ryoshoku
Real estate construction Mitsubishi Estate
P.S. Mitsubishi
Corporate governance systems
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The post-war keiretsu

• Mitsubishi Fuyo
• Bank of Tokyo-Mitsubishi Fuji Bank
• Mitsubishi, Nikon, Marubeni
• Kirin Beer
• Sumitomo Dai-Ichi
• Sumitomo Bank Dai-Ichi Kangyo Bank
• NEC Nissan, Canon
• Mitsui Sanwa
• Sakura Bank Sanwa Bank
• Toshiba Kobe Steel

Corporate governance systems
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Financial modernization in Japan

• Mitsubishi UFJ Financial Group (MUFG)
• Bank of Tokyo-Mitsubishi UFJ Mitsubishi keiretsu
• UFJ Holdings Sanwa Tokai keiretsu
• Mizuho Financial Group (MHFG)
• Industrial Bank of Japan Independent
• Dai-Ichi Kangyo Bank Dai-Ichi keiretsu
• Fuji Bank Fuyo keiretsu
• Sumitomo Mitsui Banking Corp (SMBC)
• Sumitomo Bank Sumitomo keiretsu
• Sakura Bank Mitsui keiretsu

Corporate governance systems
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MA activity ( of deals)
Compiled from Mergers and Acquisitions.
Corporate control and MA
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MA values ( billions)
Compiled from Mergers and Acquisitions.
Corporate control and MA
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Privatization deals
OECD Financial Market Trends, June 2001
Corporate control and MA
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Privatizations of state-owned enterprises in
transition economies

• Privatizations of state-owned enterprises are
  usually conducted as a
• Voucher program
• Management buyout (MBO)
• Mass privatization program (MPP)
• Effective legal and corporate governance systems
  are prerequisites for a successful transition to
  a market economy

Corporate control and MA
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Russias troubled privatization

• Russia 1992 through 1996
• Vouchers were used to distribute ownership in
  state-owned enterprises to Russian citizens
• Managers repurchased many of these shares and
  retained controlling interests in most firms
• Fraud was rampant, and foreign investors were
  often disenfranchised
• Financial oligarchs established control over
  Russias commercial banks and natural resource
  firms
• Russias privatization program struggled because
  it was conducted without concurrent reforms in
  legal, regulatory, and administrative systems

Corporate control and MA
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Russias troubled privatization
Corporate control and MA
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Relatively successful privatizations

• Poland 1991-1995
• Poland promoted the growth of free enterprise
• State-owned assets were slowly sold to investors
• Strong labor unions monitored managers
• Czech Republic 1991-1995
• Assets of 350 state-owned firms sold to investors
• 1,800 firms privatized through vouchers
• Most vouchers reinvested in diversified
  investment funds that monitored managers
• These transitions were relatively successful
  because these countries developed institutions
  that promoted good corporate governance
• Enforceability of contracts
• Effective monitoring of corporate insiders

Corporate control and MA
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The winners and losers

• Target firms
• Target firms shareholders receive large gains
  during the announcement period
• Acquiring firms
• Within the U.S. market, shareholders of acquirers
  may or may not win
• The shareholders of acquirers in non-U.S. markets
  are more likely to win
• The shareholders of acquirers in cross-border MA
  are more likely to win

Corporate control and MA
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Contributing factors

• Method of payment
• Cash offers are more likely to benefit bidding
  firm shareholders
• Free cash flow
• Firms with free cash flow often waste it
• The tax environment
• MA can facilitate the transfer and realization
  of tax benefits
• Real exchange rates
• A strong domestic currency helps domestic
  acquirers

Corporate control and MA
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Similarities in executive turnover

• Cross-border similarities in top executive
  turnover
• Higher executive turnover in firms suffering a
  sharp decline in equity value
• Higher executive turnover in firms reporting poor
  earnings performance

Corporate control and MA
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Differences in executive turnover

• Cross-border differences in top executive
  turnover
• In bank-based systems, turnover tends to be
  initiated by the lead bank (Germany) or the
  principal shareholders (Japan)
• In market-based systems, control contests are
  held through proxy contests or directly in the
  marketplace through tender offers

Corporate control and MA
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When the turnover-performance relation breaks down

• China
• Top executive turnover is related to performance,
  but only for firms in the private sector
• Firms with politically connected CEOs
  under-perform those without politically connected
  CEOs
• Italy
• Minority investors have few legal protections
• The relation between top executive turnover and
  firm performance is weak when
• control is in the hands of one shareholder
• the controlling shareholder is the top executive

Corporate control and MA
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Caveat

• Increasing competitiveness in the international
  market for corporate control is likely to change
  some of these conclusions
• Further research will surely modify or extend
  these conclusions