Merger and Acquisition Terms for Multinational Corporations

Merger

A combination of two or more companies in which the resulting firm maintains the identity of the acquiring company.

Consolidation

The combination of two or more firms, generally of equal size and market power, to form an entirely new entity.

Portfolio Effect

Merger allows acquiring firms to enjoy potentially desirable portfolio effect:

• Achieves risk reduction while maintaining firm’s rate of return

Tax Loss Carry Forward

A loss that can be carried forward for a number of years to offset future taxable income and perhaps utilized by another firm in a merger.

Horizontal Integration

The acquisition of a competitor.

Vertical Integration

The acquisition of customers or suppliers by the company.

Synergy

The recognition that the whole may be equal to more than the sum of the parts.

Pooling of Interest

Prior to 2001:

1. Acquiring firm issues only common stock in exchange for most of the other firm’s voting stock
2. Acquired firm’s stockholders maintain ownership position in surviving firm
3. Combined entity does not intend to dispose of a large portion of merged firm assets within two years
4. Combination affected in a single transaction

Goodwill

An intangible asset that reflects value above that generally recognized in the tangible assets of the firm.

Takeover Tender

An unfriendly offer that is not initially negotiated with the management of the target firm.

White Knight

A firm that helps to avoid unwanted takeover offers.

Multinational Corporation

A firm doing business across its national borders is considered a multinational enterprise. Some definitions require a minimum percentage of the firm’s business activities to be carried on outside its national borders.

Exchange Rate

The relationship between the value of two or more currencies. For example, the exchange rate between US and British pound is stated as dollars per British pounds or BPPD.

Purchasing Power Parity Theory

A theory based on the interplay between inflation and exchange rates. A parity between the purchasing powers of two currencies. Currency exchange rates therefore tend to vary inversely with their respective purchasing powers in order to provide the same or similar purchasing power.

Interest Rate Parity Theory

A theory based on the interplay between interest rate differentials and exchange rates. If one country has a higher interest rate than another country after adjustments for inflation, interest rates, and foreign exchange rates will adjust until the foreign exchange rates and money market rates reach equilibrium.

Balance of Payments

The term refers to a system of government accounts that catalogs the flow of economic transactions between countries.

Spot Rate

The rate at which currency is traded for immediate delivery. It is the existing cash price.

Forward Rate

A rate that reflects the future value of a currency based on expectations. Forward rates may be greater than the current spot rate.

Cross Rates

The relationship between two currencies expressed in terms of a third country currency.

Repatriation of Earnings

Earnings returned to the multinational parent company in the form of dividends.

Expropriate

The action of a country in taking away or modifying the property rights of a corporation or individuals.