Foreign Investment : Foreign investment takes two forms :
(1) Foreign Portfolio Investment : It is an investment in the share and debt securities of companies abroad in the secondary market nearly for sake of returns and not in the interest of the management of the company. It does not involve the production and distribution of goods and services. It simply gives the investors, a non-controlling interest in the company. Investment in the securities on the stock exchange of foreign country or under the global depository receipt mechanism is an example.
(2) Foreign Direct Investment : It is very much concerned with the operations and ownership of the host country. It is an investment in the equity capital of a company abroad for the sake of the management of the company or investment abroad through opening of branches. It is found inform of :
(a) Green-field Investment : It takes place either through opening of branches in foreign countries or through foreign financial collaboration. If the firm buys entire equity shares of a foreign company, the later is known as wholly-owned subsidiary of the buying firm. In case of purchase of more than 50% shares, the later is known as subsidiary of the buying firm. In case of less than 50%, the later is known as equity alliances. General Motors of USA has 20% shares in the equity of the Italian firm Fiat and Fiat maintains 5% shares in equity of General Motors.
(b) Merger and Acquisition : M &A are either out right purchase of running company abroad or an amalgamation with a running foreign company. There are three forms of M & A :
(i) Based on corporate structure : Acquisition, where one firm acquire or purchase another firm. Amalgamation, in this two merging firms lose their identity into a new firm that comes into exist representing the interest of the two.
(ii) Based on Financial Relationship: It can be vertical, horizontal and conglomerate. In horizontal, two or more firms are engaged in similar lines of activities join hands. Horizontal m & A helps to create economies of scales in occurs among firms involved in different stages of production of a single final product. If oil exploration and refinery firms merge, it will be called a vertical integration. Conglomerate merger involves two or more firms in unrelated activities.
There are financial conglomerates where a company manages the financial function of other companies in the group. Similarly, there are manageria
l conglomerates combining the management of several companies under one roof.
(iii) Based on techniques : M & A are either Hostile or Friendly. In the hostile takeovers, the time devoted to negotiations is minimized as much as possible because it is just the discreet purchase of shares of the target company. In friendly takeovers, there are a lot of negotiations. The takeover deal is not disclosed until it is finalised. To this end, the acquiring company signs the confidentiality letter whereby it promises not to disclose the fact to third party. Finally, after the announcement is made to the press, a contract is signed.
Motivation of Merger & Acquision : There are following motives behind M & A :
(a) M & A provides synergistic advantages. For example, when the fixed costs in firm A does not cross the relevant range even after it acquires firm B, the combination will lead to saving of fixed costs that firm B was previously incurring.
(b) It enables the overnight growth of firm. At the same time very risk of competition reduces after merger.
(c) It reduces financial risks through greater amount of diversitification. More particularly in case of conglomerates, assets of completely differently risk classes are acquired and there are possibilities of negative correlation between the rates of return.
(d) It leads to diversification, which raises the debt capacity of the firm. It helps the cost of capital to move downward and raises the value of corporate wealth.
(e) The tax savings sometimes leads firms to combine.
In international business, M & A are very common now a day because of above said reasons. However, international M & A sometimes becomes an essential step when the domestic market is saturated and firm is desirous of further expansion for reaping gains from external economies.
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