Lecture 14A Synthesis

DR. VICTOR Z. CHENUNC CHARLOTTE

Make-up quiz

This Friday, December 4th, 3:45-4:45pm, Friday Building #142

Only for excused misses

A review of the course structure

Part I. OLI Paradigm for MNE competitive advantages O (brand, resource control, market control, management adv,

knowledge/experience adv) L (basic need and potential, economic/financial conditions,

political/legal forces, socio-cultural forces, competitive environments) I (benefits of FDI vs. alternative modes, e.g., exports, license, etc.)

Part II. Multi-dimensional institutional analysis Financial-economic: calculative, rational; relatively changing (1-10 yrs) Legal-political: coercive; changing slowly (10-100 yrs) Socio-cultural: mimetic; relatively unchanging (>100 yrs)

Wells Fargo Project as a comprehensive practice

Research Questions: 1) Global opportunities for investment banking

division 2) Global risks and strategic responses for the

opportunities identified in step 1

Wells Fargo IB in the world

Wells Fargo IB in the world

A top 9 player overall. Strong bonds/loans services (10th and 5th globally). Relatively weak M&A services (21th globally, 17th in Americas, <10% of

Goldman Sachs, < average fees% per deal among top 25).

Wells Fargo IB in the world

M&A services Legal/financial advisory services, e.g., fair opinions. Equity arrangement and provision Bond/loan arrangement and provision

Currently, the business of M&A services as a window to new clients and a leverage to other regular services (equity, bonds, loans) is relatively closed. Many new clients start with M&As before other IB services, since it is a relatively entry

level service: relatively low fee% (0.57% of a deal value compared to 2.50% of a deal value for equity services)

It is a bottleneck which limits the transactions between global demands in IB services in equity, bonds, and loans and Wells advantages in supplying these services.

Wells supply of

EquityBondsLoans

World demand ofEquityBondsLoans

M&As

In fact, M&A is the only IB segment that is still growing at the global scale, esp. in Americas, Europe, and Asia Pacific

In fact, M&A is the only IB segment that is still growing at the global scale, esp. in Americas, Europe, and Asia Pacific

Ownership (firm-specific) advantages of Wells Fargo to join the competition in global M&A services

Knowledge/experience as a major O disadvantage

Table 1. Number of M&As (>US$ 1 mil.) Wells Fargo or its subsidiaries serviced during 2005-2014

Source: Thomson Reuters SDC

Finding a good fit between locational advantages and ownership (firm-specific) advantages

>93% of M&A services O Advantages

L advantages

Ultimate long-term market (1 of 2)

L advantages

M&A markets

(1)Domestic M&A markets outside the US (e.g., Canadian-Canadian)(2)International M&A markets outside the US (e.g., Canadian-America; Canadian-French)

(2a) International M&A markets without a US acquirer or target(2b) International M&A markets with a US acquirer or target

(2) is easier than (1), and (2b) easier than (2a)

L advantages

More broadly, FDI market

International M&A markets belong to the genre called foreign direct investments (FDI)•According to UNCTAD World Investment Report, there were totally US$1.23 trillion FDI flows in 2014

• Including more than US$900 billion gross value of international M&As.

• The other parts of FDI include greenfield investments and reinvestments of retained earnings.

• All FDI modes require financial advisory services and equity/financing.

Ultimate long-term market (2 of 2)

Maximizing the long-term market potential:Two strategic paths

L advantages

Short-term:US-vs-US

M&As

Long-term butdomestic:Entire US All other IB markets(equity, financing, etc.)

Long-term, global:

All otherM&A markets

in the world

Long-term, global:All other

FDI marketsin the world

Medium-term,

global:US FDI not via M&As

Long-term, global:

International M&As

Medium-term,

global:US-vs-non-US M&As

Locational advantages analysis:Following Globerman & Chen (2010) ReviewFive Steps Variables Reasons of inclusion (How does each variable

affect the size and dynamics of our potential client markets, e.g., U.S. acquisitions into the

market)?

Data sources

Basic need and potential

GDP growth in US$Stock Market CapTwo-Way FDITwo-Way TradeForeign to total bank %

New business opportunities being createdSize of the market for ownership and controlInternational investments for ownership and controlPotential growth of FDI in futureGeneral openness to foreign banking operations

World BankWorld BankUNCTADUNCTADWorld Bank

Financial and economic conditions

Two-Way FDI with the USTwo-Way M&A with the USTwo-Way Trade with the US

GDP/GDP growth by certain industries

It is easier to chase American clients or foreign clients looking for American experiences

It is easier to focus on industries in which Wells had M&A advisory experiences

UNCTAD

Legal-political factors Bilateral investment treaties with the USFree trade agreements with the US

Rule of lawRegulatory qualityAnti-CorruptionPolitical stability

It is more likely for M&As/FDI between the US and other countries with investment/trade agreements

It is easier to compete with local counterparts (who have more local political contexts) in a stronger legal systems

UNCTAD

World Bank

PRG Yearbook

Socio-cultural factors Same official language (English)Cultural proximityTrust in foreign nationalsTrust in banking services

It is easier to communicate with similar cultures and cultures that trust foreign banks in general

WikipediaHofstedeWVSWVS

Competitive environment

List leading M&A advisors based on their advisory services to American firms (targets and acquirers)

These will be the major competitors with Wells Fargo in the same client markets, competing for American clients

Course website

Mergent Online

Strategic path 1:US-US M&As US-vs-non-US two-way FDI (including US-vs-non-US two-way M&As) entire FDI markets in the world

Table 1. Post-2008 two-way FDI with US, by partner country

Source: UNCTAD StatisticsTable 2. Post-2008 two-way FDI by country

Source: UNCTAD Statistics

Rank Partner nation Post-2008 two-way yearly mean

values ($bil.)

%

1United Kingdom 139.6 17.12Canada 112.3 13.83Australia 48.6 6.04Germany 48.1 5.95France 47.6 5.86Japan 39.3 4.87Netherlands 27.7 3.48India 23.4 2.99Switzerland 20.5 2.5

10Spain 19.9 2.411Brazil 19.1 2.312China 18.3 2.213Israel 16.1 2.014Unknown 15.8 1.915Ireland-Rep 15.3 1.916Sweden 13.8 1.717Italy 12.8 1.618Mexico 11.6 1.419Bermuda 11.3 1.420South Korea 11.1 1.421Denmark 10.1 1.222Hong Kong 10.0 1.223Norway 9.3 1.124Taiwan 9.3 1.125Belgium 8.1 1.0

Rank

Nation Yearly mean value ($ bil.)

Standard Deviation ($ bil.)

Growth%

2009-13 2004-13 2009-13 2004-13 2009-13 2004-13

1United States 514.2 480.8 66.9 145.7 6.2 26.62China 193.5 148.6 27.9 56.6 10.6 15.52China, Hong Kong SAR 163.3 129.7 30.7 45.8 13.9 14.73Germany 120.6 124.2 45.6 68.1 8.9 128.84British Virgin Islands 119.6 83.5 30.4 49.6 18.6 49.35Russian Federation 114.2 93.3 36.7 43.9 26.0 28.96Japan 102.0 88.9 32.6 41.3 21.1 26.17United Kingdom 99.9 194.6 38.6 139.1 -6.1 5.88Canada 84.1 94.6 20.1 42.7 15.2 19.79France 78.5 134.4 49.1 79.6 -39.5 -6.2

10Singapore 75.6 60.2 16.2 26.0 20.7 32.511Switzerland 72.5 70.3 29.3 30.6 13.9 23.612Belgium 61.9 115.2 106.7 132.0 -0.3 18.113Australia 57.3 47.3 12.6 38.3 12.4 -40.714Netherlands 53.3 81.1 24.8 50.3 104.8 71.915Brazil 52.9 46.4 20.8 19.7 70.0 42.316Spain 51.5 89.8 26.8 56.8 88.0 41.417Ireland 51.0 30.3 16.7 28.8 28.9 210.818Italy 45.5 60.7 28.5 36.6 129.3 68.119India 41.3 37.0 9.6 18.3 -11.3 30.420Mexico 38.5 35.0 8.7 7.8 18.9 9.221Sweden 37.3 44.9 9.9 14.7 15.7 10.322Korea, Republic of 37.1 31.1 6.1 8.2 13.0 9.523Norway 36.1 29.4 5.4 10.2 -5.6 30.024Luxembourg 34.4 31.6 20.8 17.1 98.6 57.625Chile 34.2 24.1 12.8 14.4 19.1 20.3

Strategic path 1:US-US M&As US-vs-non-US two-way FDI (including US-vs-non-US two-way M&As) entire FDI markets in the world

Estimating the total size of the ultimate market potential: The top 20 FDI markets during 2009-

2013 represents an average of annual FDI flows of US$ 2.2 trillion

Using 0.57% fee-to-value ratio, this market size means an annual income of M&A service fees of $12.5 billion Benchmarks:

2014 best performer, JP Morgan total fees (M&A, equity, bonds, loans) were $6.4 billion

2014 Wells Fargo’s total fees (M&A, equity, bonds, loans) were $2.5 billion

Strategic path 2:US-US M&As US-vs-non-US two-way M&As entire M&A markets in the world

Table 1. International M&As involving a US firm (>$1 mil., externally advised) during 2009-2014

Source: Thomson Reuters SDC

Table 2. All M&As (>$1 mil., externally advised) during 2009-2014

Source: Thomson Reuters SDCRank Partner nation Yearly mean

value (US$ Bil.)1United Kingdom 36.02Canada 28.23Switzerland 24.04Japan 17.95France 11.86Germany 11.47Netherlands 7.58Ireland-Rep 6.99Australia 6.6

10Sweden 5.011Spain 5.012China 4.513Bermuda 3.314Mexico 3.115Italy 3.116Brazil 3.017Belgium 2.918Luxembourg 2.819India 2.820Norway 2.621South Korea 2.522Denmark 2.223Israel 2.124Chile 1.925Singapore 1.8

Rank Nation Yearly mean value (US$ Bil.)

1United States 1487.22United Kingdom 223.23Canada 166.14China 155.65Japan 147.26France 116.97Germany 111.08Brazil 109.79Australia 106.0

10Spain 100.711Switzerland 87.512Russian Fed 82.213Netherlands 57.514Italy 57.415China, Hong Kong SAR 52.616South Korea 47.117Mexico 32.418Sweden 31.919India 30.420Belgium 29.621Singapore 28.122Ireland-Rep 22.823Malaysia 22.524Norway 21.525Greece 17.2

Estimating the total size of the ultimate market potential: The average market value of the top 20

M&A markets during 2009-2014 is US$ 3.2 trillion

Using 0.57% fee-to-value ratio, this market size means an annual income of M&A service fees of $18.4 billion Benchmarks:

2014 best performer, JP Morgan total fees (M&A, equity, bonds, loans) were $6.4 billion

2014 Wells Fargo’s total fees (M&A, equity, bonds, loans) were $2.5 billion

Strategic path 2:US-US M&As US-vs-non-US two-way M&As entire M&A markets in the world

Finding a good fit between locational advantages and ownership (firm-specific) advantages

L advantages

Market-supporting institutions:

Strong property rightsFree/fair competitionLow transaction costs

Strong contract enforcement

Transit hub strategy:Headquartered in a strong

market, while serving multiple other larger markets in a common

market system1)FTA/BIT

2)Large regional two-way FDI

3)Market/tax advantages4)Existing Wells Fargo

infrastructures

Finding a good fit between locational advantages and ownership (firm-specific) advantages

L advantagesPolitical risks:

Scope: Micro vs. macroRisk source:

Governmental/legal vs. Non-legal/extra-governmental

Corporate political strategy:

Prior to entry: insuranceAt entry: B2G negotiationPost entry: Relational vs. transactional activities

Finding a good fit between locational advantages and ownership (firm-specific) advantages

L advantages

Socio-cultural barriers:

1)Language2)Western vs. Eastern

thinking3)Hofstede’s cultural

dimensions to spot major areas of cultural frictions

Finding a good fit between locational advantages and ownership (firm-specific) advantages

L advantages

Degree of competition in the local market:

Choose the market with lower % market share by

top 5 existing competitors

Comparative analysis with existing competitors:JV with the competitor

with the most complementary O

advantages (esp. strong knowledge/experience and local client access,

but lower control of resources and brand

advantages, etc.)

An Example:HK/China FDI Market

HK/China FDI Market

Over the long term, capture Greater China FDI market via Hong Kong SAR as a transit hub, while in the medium term serve US-HK/China FDI players based on existing US-related knowledge/experience/clients Estimated medium-term market size and fees

income 12th and 22th two-way FDI partners with US: $40.3 billion

yearly mean value Under 0.57% fee-to-value ratio, total annual fees of $229.7

million Estimated long-term market size and fees income

The largest two FDI markets in the world behind US: $356.8 billion yearly mean value

Under 0.57% fee-to-value ratio, total annual fees of $2.0 billion

HK/China FDI Market

Why not China directly, but HK? transit hub advantages

Category Specific examples US Hong Kong SAR ChinaStrong property rights

Registration of private property (days, % of property value)Legal protection of private property (1-10, 10 best)Investor protection (1-10, 10 best)Intellectual property rights (IPR) protection (1-7, 7 best)

15.1, 2.1%7.28.35.4

27.5, 7.7%8.49.05.8

19.5, 3.4%5.85.04.0

Free and fair competition

Easy entryLow government consumption (1-10, 10 best)Low government enterprises/investments (1-10, 10 best)Low corporate taxLow other taxes and feesNo informal competitionFor financial industry in particular:Freedom of foreign ownership/investment (1-10, 10 best)Freedom from government control of capital (1-10, 10 best)Foreign to local bank % (the higher, the better)

5.6 days6.48.040%4%Very low 6.53.831%

1.5 days8.110.016.5%6.5%Very low 8.96.973%

31 days3.72.025%43%57.6% 6.20.820%

Low transaction cost

Credit (% of adults covered by credit bureau; depth of information)Strong auditing/reporting standards (1-7, 7 best)Low trading barriers (hours)Free trade agreementsBilateral investment treatiesFreedom of migration

100%, 8.05.57None with HK or ChinaNone with HK or ChinaNo visa to HK, needs visa to China

96%, 7.06.220With ChinaWith ChinaNo visa to China or US

0%, 7.04.4103With HKWith HKNo visa to HK, needs visa to US

Strong contract enforcement

High corporate ethicsLegal resolution of contract claims (days, cost as % of claim)

4.8420 days, 31%

5.5360 days, 21%

4.2453 days, 16%

HK/China FDI Market

Competitive environments: The current structure of competition:

Who are the existing competitors? The degree of market competition (e.g., % market share by

top 5) Enter alone or joint venture? If JV, with whom?

Who has strong local knowledge/experience and client access, and meanwhile lacks global brand advantages and control of resources (e.g., size, capitalization, etc.)?

Not competitive to enter alone, give little local knowledge/experience and client access

Table 1. Number of M&As (>US$ 1 mil.) Wells Fargo or its subsidiaries serviced during 2005-2014

Source: Thomson Reuters SDC

Cross-cultural management in HK/China: Major dimensions of cultural frictionsSource: Hofestede

Comparative analysis for entry strategy and, if necessary, a potential JV partner

Many teams did not do well in this section, which is very important to finding the right entry strategy and potential JV partner Look into two categories

In the segment of your chosen medium-term market, who are the existing M&A service providers (e.g., all M&As excel table)? For instance, if your chosen medium-term market is US firms making investment into HK, then you need

to know who are the existing M&A service providers for US acquirer firms in HK (target/host country). Other local financial institutions

Although they are not active in M&A services, they may possess a huge base of local clients. Pick the largest 2-3 of each category into the O advantages comparative analysis

Use both available information/proxies to make your judgment, for instance, firm size/market cap as a proxy for control of resources brand ranking in FT league table as a proxy for brand advantages # and dollar values of deals of local financing/M&A services as a proxy for local knowledge/experience

Find the one with the most complementary O advantages In Wells Fargo’s case, relatively weak brand, control of resources, but strong access to local

clients and rich local experience/knowledge.

An example, in the medium-term, Wells has to compete with existing competitors that are already serving US clients into HK, 2005-2014Source: Thomson Reuters SDC

AcquirerNation

TargetNation

Parent of AcquirerAdvisor (Short Name)

Total Deal Values ($ mil)*

United States Hong Kong Citi1555.53

United States Hong Kong Goldman Sachs & Co810.17

United States Hong Kong Morgan Stanley789.83

United States Hong Kong Credit Suisse776.28

United States Hong Kong Bank of America Merrill Lynch372.15

United States Hong Kong Lazard350

United States Hong Kong Deutsche Bank335.37

United States Hong Kong CIBC World Markets Inc257.58

United States Hong Kong JP Morgan230.5

United States Hong Kong Barclays229.54

United States Hong Kong Macquarie Group135

United States Hong Kong Halter Financial Group Inc64.32

United States Hong Kong Mooreland Partners LLC64

United States Hong Kong CIMB Group Sdn Bhd31.77

United States Hong Kong DBS Group Holdings31.77

United States Hong Kong Ladenburg Thalmann & Co8.82

United States Hong Kong Platinum Securities Co Ltd1.44

Hong Kong/ChinaO advantages relative scores (1 to 5, 5 highest)

 

Wells Fargo

Citi Goldman Sachs &

Co

Hang Seng Bank

Bank of China (Hong Kong)

Wells Fargo - Hang

Seng JV

Wells Fargo - Bank of China JV

Brand Advantages 5 5 5 2 3 5 5Control of Resources 5 5 5 3 4 5 5Control of Local Clients 1 3 3 4 5 4 5Managerial Skills in Local Contexts 3 3 4 3 5 3 5Local Knowledge/ Experiences 0 4 5 4 5 4 5

Comparative analysis for a potential JV partner (a hypothetical example below)

Best JV choice:Strong

Complementarity

Major Competitors:1)No complementarity2)Already strong in most fields

Hypothetical JV:

Stronger in all fields

than Citi and

Goldman Sachs

Comparative analysis

This part can be very important as a way to offer some concrete suggestions at the firm-level.

I’d suggest that every team (re)conduct careful research for this part.

For each relative O advantage score (1-5), you should remember the concrete/quantitative reasons behind your judgments. The judges in the final will surely ask how you did the score, and you should be prepared to give very specific examples, e.g., the size comparison, or #/values of M&A deals, etc.

Questions Any last minute questions about your report 2 and final

presentation? I will be happy to take a look at your draft before your submission. Final presentation: The best ideas/evidence of both reports,

structured in a coherent organization. Recommendation is no more than 10 slides plus one introduction page (the title, your names, student IDs) and less than 8 minutes talk.

Week #16 (December 9th and 11th): You are encouraged to do rehearsals of your presentation in the classroom and I will give instant feedback.

Remember to bring three hardcopies of your powerpoints (in color printing) for the three judges during the final presentation. Please print 2 slides on each page, and on both sides of the paper. In other words, the hardcopy will contain no more than 3 pieces of paper (10 slides).

ContactVictor Z. ChenBelk College of BusinessUNC Charlotte

+1 (704) 687-7645

zchen23@uncc.edu

www.ChenZitian.com