MnA_Module_10

MODULE 10
CROSS BORDER MERGERS AND ACQUISITIONS

10.1 Introduction

To understand the concept of Cross Border Merger and Acquisitions we need to first understand
what a Merger is. Now, merger is the process in which a company buys another
companyreferred to as the target company.

This is usually done in two different ways. It can be either friendly or hostile. In the former
situation, the two companies are involved in a negotiation to merger-related issues in terms of the
merger itself. In hostile mergers, the target company is unwilling to sell its shares to buyer or
bidder. Often the target's boards are not awareand the purchase process is made by other entity.
This process is complex and involves something called the proxy i.e. it will play a role in
purchasing shares or influencing the shareholders.

Merger can be best defined as the legal or juridical act of two or more legal persons, whereby
one acquires the property, rights and interests and the liabilities of the other by universal
succession of title or whereby a new legal person, formed or incorporated by them jointly by
such juridical act, acquires their property, rights and interests and the liabilities by general title.

Thus, a merger is the process of transferring liabilities and assetsfrom one company to another
and forming a new legal entity by contract.

10.2 Cross- Border Merger and Acquisitions- Basic Concept:

From the term Cross border itself we can understand that it refers to some situation involving
two different countries across the border.

A company in one country can be acquired or bought by an entity that is another company from
other countries. The local company can be public, private, or state-owned company. This event
of a merger or acquisition by any foreign investors is referred to as cross-border merger and
acquisitions.

It is necessary to remember that in a corporate merger, the headquarter of the new company can
be in either of the two countries.

Since cross border mergers and acquisitions involve two separate countries, the state where the
origin of the companies that make an acquisition that is the acquiring company is referred to as
the Home Country, while countries where the target company is situated refers to as the Host
Country.

HOME COUNTRY HOST COUNTRY

The country where the The country where the target
acquiring company is situated. company is situated.

10.3 Why does Cross- Border Merger and Acquisition happen?
The real motive behind Cross Border mergers can be largely attributed to the rapid rate of
globalization. As the world is becoming a smaller place to live in with better connectivity owed
to the development of technology, cross border mergers are starting to be more and more
profitable for companies.

According to the World Investment Report 2009, Cross Border Mergers & Acquisitions have
been continuously rising since 2010 in many regions. Especially in Asia with its increasing status
in the global economy

To simply put it, the various motives leading to cross border Mergers &Acquisitions are as
follows-

❖ Increased profitability
❖ Cost reduction
❖ Revenue enhancement
❖ Gain in power and efficiency
❖ Market development

Foreign Direct Investment Motive Financial

Motive

In the last few decades, economic development

has become largely globalised, and there is a

progress towards the development of intense The main reason of entering into a Cross

international networks in almost every sphere Border Merger & Acquisition is related to

of business. financial gain.

One of the trends show an increase in Foreign
Direct Investment or FDI.

FDI is a long-term active participation of a In most cases, financial motive is more distinct

foreign country in other countries usually in than any other motive. It is for the purpose of

the form of joint ventures, management, and doing mergers and acquisitions, in which the

transfer of technology. decision is based on interests of the board of

directorsand the shareholders.

FDI can be essentially divided into two types.
They are Inward and Outward.

The relation between FDI inflow with Cross
Border Mergers &Acquisitions, can be seen in
the complexity of company matters where they
adopt regional and localised strategies and
intricate network structures. This facilitates
intra-regional economic interdependency
between counties.

10.4 Effects of Cross Border Merger and Acquisitions:

It has been observed that this type of mergers and acquisitions lead to the restructuring of the
production value and industrial assets in terms of the entire world.
It leads to the exchange or transfer in capital fund, technology, and services while forming it into
one intricate global network. It benefits the economy, productivity and growth of companies all
across the globe.

10.4.1 Capital Fund
Cross border merger and acquisitions contribute in the accumulation of the capital fund for a
long term. To expand the business, it not only undertakes investments in buildings, plants, and
equipments but also in the intangible assets such as the technical part, skills and other significant
aspects.

10.4.2 Employment:
It often leads to creation of employment opportunities. The expansion of the business requires
skillful workers onboard and thus leads to a massive field of employment arena.

10.4.3 Exchange of technology:
When companies across countries come together it leads to positive effects of transfer of
technology and sharing of the best management team This in turn leads to innovations and has a
significant influence on the functions and projects of the company.

10.5 Challenges faced
The challenges faced in cross border mergers and acquisitions are same as for domestic ones.
The big difference lies in the gap in territorial proximity and localized grouping.

Let us briefly discuss the issues and challenges faced during the cross border mergers and
acquisitions.

10.5.1 Political concerns-
The political scenario or turmoil of a country poses a threat in cross border mergers and
acquisitions, particularly for industries which are situated in politically sensitive areas.

10.5.2 Cultural challenges:
The cultural aspect plays a key role in the success of cross border merger and acquisitions. We
have witnessed huge mergers failing because of the cultural issues they have had. In order to
overcome this particular challenge, businesses need to invest good amount of time, money and
effort to be aware and sensitized of the local culture, regional issues and try to gel with the
concerned company.

10.5.3 Legal considerations:
Companies that are willing to merge cannot possibly overlook the facingof various legal issues.
Various laws in relation to security, corporate and company matters are bound to cross paths
with each other. Hence, before closing the deal, it is of absolute importance to review the
employment regulations and laws thereto.

10.6 Conclusion:
In spite of all the challenges faced and legal issues cropping up, cross border mergers and
acquisitions lead to a massive profit factor for companies universally. It is because of this very
reason, that we see so many mergers taking place every day.