Domestic and International Money Markets Domestic and International Capital Markets The Derivatives International Equity and M&A Using the Global Capital Markets: Global Banking Strategy and Implementation
Euro-Deutsche Mark Market Foreign Exchange Market Euro-Yen Market
Euro-Floating Rate Note Market
Japanese Domestic Market
Straight Eurobond Market
International Financial Markets 4
Giddy
Global Banking: Review I/3
Interest Rate Linkages in the International Money Market Two stories to tell: l Domestic vs. Euro l Eurocurrency A vs. Eurocurrency B Domestic Market A
Products Credit products l Trading and positioning l Risk management products l Financial engineering and structured finance l Underwriting and distribution l Asset management l Retail and private client services l Transactions services l
New Financial Products: Economics of Financial Innovation Certain kinds of market imperfections allow hybrids to flourish l But innovation are readily copied; so only certain kinds of firms can profit from innovations. l There is a product cycle and profitability cycle of innovations. l
Financial Innovations: What to Look For Reallocating risk l Increasing liquidity l Reducing “agency costs” l Reducing transactions costs l Reducing issuers’ or investors’ taxes l Circumventing regulations l Circumventing internal constraints l
Each year, BMG chooses to produce if P>300 defer if P Value of A + Value of B + Cost of transaction] l
Synergy u
l
Gain market power u
l
Eg Martell takeover by Seagrams to match name and inventory with marketing capabilities Eg Atlas merger with Varity. (Less important with open borders)
Discipline u u
Eg Telmex takeover by France Telecom & Southwestern Bell (Privatization) Eg RJR/Nabisco takeover by KKR (Hostile LBO)
l
Taxes
l
Financing
u
u
Eg income smoothing, use accumulated tax losses, amortize goodwill Eg Korean groups acquire firms to give them better access to within-group financing than they might get in Korea's undeveloped capital market
Fallacies of Acquisitions Size (shareholders would rather have their money back, eg Credit Lyonnais) l Downstream/upstream integration (internal transfer at nonmarket prices, eg Du Pont/Conoco, Pru/Bache) l Diversification into unrelated industries (Kodak/Sterling Drug) l
M&A Advisory Services: 1. Role of the Seller's Advisor l l l
l l l l l
l l
Develop list of buyers Analyze how different buyers would evaluate company Determine value of the company and advise seller on probable selling price range Prepare descriptive materials showing strong points Contact buyers Control information process Control bidding process Advise on the structure of the transaction to give value to both sides Ensure all nonfinancial terms are settled early Smooth postagreement documentation
M&A Advisory Services: 2. Role of Buyer's Advisor l l l l l l l l l l l l
Thoroughly review target & subs Advise on probable price range Advise on target's receptiveness Evaluate target's options and anticipate actions Devise tactics Consider rival buyers Recommend financial structure and plan financing Advise on initial approach and follow-up Function as liason Advise on the changing tactical situation Arrange the purchase of shares through a tender offer Help arrange long term financing and asset sales
Global Brivate Banking Key Issues to be Addressed Personal, family, business and political/economic context l Personal Investment Portfolio l Personal Retirement Plans l Insurance l Estate Planning l Businesses l
Citigroup Buy? Sell? Hold? l What’s unusual about the deal? l Will the combination produce net positive economic value? l From where? Who will get it? l How long before gains realized? l Risks that the deal will fall through? l
A publicly traded firm potentially has an infinite life. The value is therefore the present value of cash flows forever. t =∞ CFt Value= ∑ t t =1(1+r)
l
Since we cannot estimate cash flows forever, we estimate cash flows for a “growth period” and then estimate a terminal value, to capture the value at the end of the period: t =N CFt Terminal Value Value= ∑ + t (1+r)N t =1 (1+r)