International Finance and Current Issues in Finance Project Description

Project Scenario

A subcommittee of International Business Machines (IBM) has hired your consulting firm to assess its global strategy and identify global markets for expansion. You will present your findings to the subcommittee.  The subcommittee is interested in finding empirical evidence of value contribution of different diversification activities, domestic versus global and single versus multi-segment, by IBM   and its competitors. The second part of the work will focus on how important corporate governance issues, exchange rate risk, and cultural issues are when assessing a firm's global expansion. IBM operates in five separate business segments with revenues outside the domestic borders accounting for  of total revenues.

Diversification

Diversification activity is categorized as either related (single segment) or unrelated (multi-segment) diversification and as either domestic or global diversification. 

These choices result in the following four types of diversification:

The financial management literature is relatively well developed for domestic diversification. Lang and Stulz (1994), Berger and Ofek (1995), and Lins and Serves (1999) all find that single segment diversification creates more value than multi-segment diversification. Similar to prior diversification studies, Nam, et al.  (2006) find that single-segment firms have higher valuation than multi-segment firms. One thing to note is that most studies in diversification and firm's value has been done in the context of domestic diversification.  The financial literature is less developed when it comes to global diversification.

Deliverables

1. Identify the relevant competitors for IBM on a global landscape.   For purposes of this study, limit the competitors to U.S. publically traded companies.  This will allow for ease in data collection and analysis.  A file from Mergent is provided in the Project folder which should serve as a good starting point.  A group consisting of 8 - 10 closest competitors will represent the database. The amount of competitors will be determined by the number of observations.  The more observations, the greater the depth of your analysis.  There is an expectation that there should be at least 80 observations in your database. The Mergent database will be very helpful in identifying the events and competitors.

2. Identify diversification events for each firm in the database over the past 10 years. You might want to increase the time period for a greater sample size. It is not necessary to identify every instance of diversification activity in your dataset.  Activities should be selected by the extent of market reactions and size of the deal compared to firm's total assets or sales. Also, select major diversification event for any year, even though a firm acquired multiple targets during that particular year. This is because with multiple events in one year, it would be difficult to perform the long run effect of the diversification activities.  These events include mergers, acquisitions, and significant joint ventures.  The database should then be segmented into the four different types of diversification behavior: single segment domestic, multi-segment domestic, single segment global and multi-segment global. You should include the number of activities in each category. It will be up to the team's discretion on how the observations are categorized. 

3. Divide the sample in half with the firms with the most international diversification in one category and those with the least international diversification in the other category.  Do a financial analysis on the two different sample groups and assess whether you can detect lower volatility in one sample group over the other.  Also incorporate the total return on the stocks and see if there is a difference in the Sharpe Ratios for the companies.

4. Select four events from your analysis of IBM.  Try to select one from each of the categories. If there are not 4 separate categories for IBM select the ones that are the most different. Using Eventus, perform an event methodology with the CAPM and Fama-French models.  Please discuss the results and if there is any difference in the results. You should look at the 3 - 5 day time period after the announcement date for either process.  Present the time window that appears to strengthen your argument and use the same period for all the firms.  We are not interested in the market's response prior to the announcement.  Although this is an interesting question, it relates more to insider trading than it does to the market's response to the event.

5. Value creation is the long run effect of the activity on the firms. You will determine whether long-term firm value has increased or decreased. There are numerous measures of firm value, including such metrics as total return on the stock, MV/BV, or Tobin's Q. Choose 2 or 3 firm value metrics to use for this analysis.  You also want to test whether IBM responds similar to their competitors.  You should look at the 1 year before the announcement date and 1 year after the announcement date. This should also be done on all four of the categories.

6. Attempt to further demonstrate whether there were other financial factors such as capital structure issues, size, geographical location, etc. that may have had an effect on firm value. Also attempt to determine if there were any corporate tax incentives related to IBM's global activities. Be concise in what types of diversification were the most profitable for IBM and their competitors over the past 10 - 15 years.

7. Discuss any significant cultural and corporate governance differences between the United States and the countries that the majority of the positive global diversification activities occurred.

8. Select the major 2 -3 exchange rates that effect IBM the most. Provide an econometric model that demonstrates the factors that might affect the exchange rates. Remember that the U.S. dollar will always be one of the cross rates. Use five years of monthly data for the regression analysis.  Also provide a forecast of these exchange rates over the next 2 years and a rationale for this forecast.

Please see excel for the data.

9. Given the results of your empirical findings related to diversification for IBM and its competitors, discuss the management issues that IBM should be concerned with moving forward with M&A decisions and divestures.

Presentation Slides

At the beginning of your presentation, distribute a copy of your PowerPoint slides to each reviewer and professor. The presentation should be 25 minutes followed by a Q & A session.

References -

Berger, P. G., & Ofek, E. 1995. Diversification's effect on firm value, Journal of Financial Economics 37, 39-65.

Denis, D., & Yost, K. 2002. Global diversification, industrial diversification, and firm value. Journal of Finance 57: 1951-1980. 

Lang, L. H. P., & Stulz, R. M. 1994. Tobin's q, corporate diversification and firm performance. Journal of Political Economy 102: 1248-280.

Lins, K., & Servaes, H. 1999. International evidence on the value of corporate diversification. Journal of Finance 54: 2215-2239.

Nam, J., Tang, C., Thorton, J., & Wynne, K. 2006. The effect of agency costs on the value of single segment and multi-segment firms. Journal of Corporate Finance 12: 761-782.

Need only question number 8 and please cite few sources.

Attachment:- Project data.rar