International Financial Management

1
International Financial Management

• C45.0030.001
• T R, 930 1045 am
• Tisch Hall, UC-59
• Lubomir P. Litov

2
The instructor

• Fourth year Ph.D. in finance economics _at_ Stern.
• Spent 2 years as investment banker in Bulgaria,
  Austria, UK working on privatization deals for
  major European industrial firms, banks,
  investment companies.
• Interests in intl corporate governance, intl
  mergers acquisitions, cross-border valuation.

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Todays Agenda

• Overview of syllabus forms.
• Important Deadlines.
• Overview of the material we will cover this
  semester.
• Q Why is important to study international
  finance?
• Q How is it different from domestic finance?
• Start with analysis of the global financial
  environment.

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Objectives of the course

• Explore intl financial markets
• Main players.
• Main instruments.
• Market structure.
• Multinational Companies
• distinct exposures multinationals face?
• available financial tools to address these risks?
• Capital budgeting?
• Managing capital internationally?
• Investment Capital Structure Decisions?
• International investor
• cost benefits of intl diversification.
• Instruments for diversification.

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Syllabus

• Blackboard online software we will use.
• Textbook.
• Textbook website.
• Requirements
• Course participation (10)
• Case study team presentation (15)
• Individual case study write-up (10)
• Five Quizzes (35)
• Final Exam (30)

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Syllabus

• Case studies (12) textbook or business
  publications.
• One-minute memos.
• Problem sets
• Coming Deadlines
• 09/04 1. seating chart 2. turn in info sheet.
• 09/09 1. Form/ change teams 2. Presentation
  dates lottery.

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• Important dates
• Case study presentations
• Quizzes

1 (9/25) 2 (10/2) 3 (10/9) 4 (10/14)
5 (10/16) 6 (10/23) 7 (10/28) 8 (10/30)
9 (11/11) 10 (11/13) 11 (11/18) 12 (12/04)
1 (9/23) 2 (10/7) 3 (10/21) 4 (11/6) 5 (11/25)
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• Course topics

I Globalization History of Forex Rates Balance of Payments
II Parity Conditions Exchange ate Determination Forex Markets Forex Derivatives
III Transaction Exposure Operating Exposure Translation Exposure
IV Global Cost of Capital Global Equity Global Debt Interest rate Swaps
V Foreign Direct Investment Capital Budgeting Risk Adjustments Cross-border M A Intl Portfolio
VI Tax Management Working Capital Management
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Why study intl finance?

• Globalization integration of economies around
  the globe.
• Consume products in country A, made in country B,
  by company in country C, w/ financing from
  country D.
• e.g. Canadian buys Phillips TV, made in
  Indonesia, w/ financing from a Dutch bank.

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What is different about intl finance?

• Presence of additional costs (think of risks)
• Foreign exchange risks
• profits may melt down when unexpected unfavorable
  exchange rate movements.
• Venezuelan strike. Currency -46 2002.
• Malaysia introduces capital controls, 1998. Fixed
  rate _at_ 3.8/US vs. 4/US pre- announcement of
  capital controls.
• Country risks.
• Russia bureaucrats dont enforce law
  consistently.
• Q whats more important law existence or
  enforcement?
• Credit risks
• Not easy to seize collateral abroad due to legal
  restrictions.

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Political (or Country) Risk

• Governments have right to regulate movement of
  goods, people, capital. Laws can change
  unexpectedly.
• E.g. Russian GKO Default triggered the August
  1998 Russian crisis
• Venezuelan strike. Government forced some
  plants, e.g. Coca Cola, to re-open despite labor/
  management opposition.
• Africa AIDS concerned governments regulate
  pricing of AIDS treatment medicines (Pfizer,
  Glaxo Welcome)

12
What is different about intl finance?

• Presence of additional opportunities
• Arbitrage market imperfections
• Restrictions on flows of capital, people,
  merchandise.
• Transportation costs.
• Tax differences
• German car manufacturers in US.
• Chinese A- B-shares. Chinese can purchase only
  A-shares, foreigners, B-shares.
• Short-selling not allowed in many stock markets.
• Expand opportunity set
• Diversification (both company investor)
• Source capital, work force, merchandise w/ lower
  cost.

13
Chinese A- B- shares premium?
14
The Global Financial Environment

• (or chapter 1)

15

• Agenda
• What is globalization process?
• How globalization moves a business from domestic
  to global?
• What are the main risk exposures that arise in
  multinational businesses?
• How globalization affects corporate governance
  and the value creation for stakeholders?

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Globalization process?

• The structural and managerial changes/challenges
  experienced by a firm as it moves from domestic
  to global.

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The Globalization Process
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Risk Exposures
19
Foreign Direct Investment Sequence
Honeywell Intl (US)
Explore Competitive Advantage Abroad
Enjoy Competitive Advantage _at_ Home
Produce Home Export
Produce Abroad
Licensing, Managerial Contract
Asset Acquisition Abroad
Joint Venture
Subsidiary
Mergers Acquisitions
Greenfield Investment
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FDI Strategies

• Greenfield Investment
• A long-term physical investment in productive
  capability in that country
• Cross-Border Acquisition
• Identification, valuation, tender, and
  post-acquisition management of an existing
  going-concern.
• Joint Venture Investment
• Combining investment capital and managerial
  know-how to reach specific opportunities.

21
Multinational Enterprises (MNE)

• Incorporated in one country w/ production sales
  in other countries.
• More than 60,000 MNE w/ 500K foreign
  affiliates.
• Many MNE source raw materials in country A,
  obtain financing in country B, produce w/ labor
  capital in country C, sell output in various
  national markets.

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1999 Top MNE
1 General Electric US
2 Exxon Mobil US
3 Royal Dutch/ Shell Group Holland/ UK
4 General Motors US
5 Ford Motor US
6 Toyota Japan
7 Daimler Chrysler Germany
8 TotalFina France
9 IBM US
10 BP UK
23
How important multinationality can be?

• Answer ask Mr. Jurgen Schremmp(DaimlerChrysler
  CEO)

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(Divergent) Managerial Objectives

• What is the goal of management goal?
• Shareholder Wealth Maximization
• Max. shareholder value.
• Corporate Wealth Maximization
• Max. all stakeholders value .
• Cronysm
• Asset re-allocation to family related firms.
• Politically Connected Firms
• or the case of senator Agnelli

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Corporate Governance

• Relationship among stakeholders used to determine
  control the strategic directions of a company.
• Failures
• Rubber stamp board of directors.
• Interlocking directorates.
• Dual classes vs. one-share-one-vote class of
  stock.
• Pyramidal Structures.
• Relevance in emerging markets (Russia China).

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Corporate Governance

• Shareholder Value Max VS. Corporate Value Max.

The Non-Anglo-American Model has come under
increasing criticism for its lack of
accountability to equity investors its
shareholders while focusing on the demands of
too diffuse a group of stakeholders.
The Anglo-American Model has been frequently
criticized as focusing on short-term
profitability rather than long-term growth.
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Be big and politically connected
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Think about it

• SWM vs. CVM
• Leverage buyouts?
• Conglomerates?
• Interlocking directorates?
• High leverage?
• Stock options for the CEO?

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Intl finance from Investors Perspective

• Costs Benefits of International Portfolio
  Diversification
• as we discussed in the replies
• Behavioral Biases
• home bias even though there is a benefit to
  financial diversification overseas, still US
  investors stick to their own
• melting pot or salad bowl US foreign direct
  investments are correlated with the countries of
  origin.