What are the Risks and Challenges faced by Companies in Cross Border Merger & Acquisition Deals?
Updated: Nov 26, 2022
This blog is written by Shukla Dutta, student of Surendranath Law College, University of Calcutta.
Abstract
A few decades ago, the concept of Merger and Acquisition (M&A) was known by no one. But, over the last few decades, M&A evolved as one of the most accepted business tools used by companies to secure their existence in the competitive market and boost their growth. M&A is a great way to boost a company’s growth. As a result of globalisation and advancement of technology, M&A has gained potential importance in the business world. In the initial stage, M&A deals were limited to only one country, i.e., the companies from the same country were being acquired and merged. But, with the flow of time, M&A has gone international, i.e., companies from different countries are being acquired and merged. This concept is known as ‘Cross-Border Merger & Acquisition’. Cross-border M&A is a great way for companies to enter the international market and expand their growth and capacity. But, like any other strategic tool, the concept of ‘Cross-Border Merger & Acquisition’ has some difficulties and challenges as well. This article lays down the understanding of cross-border M&A issues, particularly legal issues and their solutions, as well as the idea of cross-border M&A have been addressed.
Keywords: Merger, Acquisition, Cross border.
Introduction
Economists may refer to this century as the age of Mergers and Acquisitions (M&As). Globalization is now a crucial aspect of the economy. Due to the increased cost pressure and stiffer competition, the methods developed at the multinational level had to be adopted. This has happened to medium-sized businesses as well as big corporations.
A company can encourage growth and raise its shareholder value through M&A. As a result, it is essential to the arsenal of a firm. The M&A world have become international over the past twenty years. It is no longer limited to the only domestic or local market. Companies of today prefer to look for targets in farther-flung regions. There are many chances for acquirers in Asia, the Middle East, and Latin America as a result of the rapid growth of these nations. Acquirers in these areas also transform regional businesses into independent acquirers. Cross-border M&A is the term used when a company looks for targets in another country. Particularly cross-border M&A might serve as a springboard for a business striving for long-term growth and profitability.
A cross-border transaction involves several intricate and frequently perplexing considerations. Therefore, overcoming these obstacles is necessary for a cross-border transaction to be successful. Elite U.S. participants in this market believe that successful transactions are feasible as a result of advanced planning, logical strategies, and deal structures that anticipate potential problems and worries. Legal difficulties (and other issues) must be recognised early on and addressed, or in some circumstances even resolved, for an inbound or outbound transaction to be successful.[1]
What is Cross Border M&A?
In simple words, a cross-border merger occurs when two companies with different geographic locations join forces to form a third company. A company from a different country may purchase a company from another country. In the case of cross-border M&As, they are mergers or acquisitions by investors from outside the country.
In a cross-border merger, control and power over the merged or acquired company will be transferred and the assets and liabilities of the two companies from two different countries are combined into a new legal entity. While in a cross-border acquisition, the local company's assets and liabilities are transformed into those of a foreign company (foreign investor) and the local company is subsequently affiliated.[2]
Reasons for Cross- border M&As
Cross-border mergers and acquisitions might be thought of as a sort of hybrid between a domestic and foreign firm. They help companies in expanding into international markets, improving their capacity to compete in the global market. Following are some causes for cross-border M&As:
1. Growth
Growth and expansion through M&As take less time and are more cost-effective. The company may quickly accomplish the same goal by M&A with an established corporation rather than going through the time-consuming process of internal expansion or diversification. Such a plan is frequently less expensive than the option of building the required production capacity and competency.[3]Building new facilities takes time, thus it can be more beneficial to buy the current facilities of another firm.[4]
2. Synergy
Synergy is defined as the cooperation of two undertakings. When two undertakings pool their resources and efforts, they may achieve greater success than if they operated individually because they can save money on operating expenses, such as by combining their sales offices, staff accommodation, plant management, etc.[5]For instance, Jiangling Motor Company Group (JMCG) was acquired by Mahindra & Mahindra Ltd (M&M), which will facilitate the company's entry into the tractor manufacturing industry.[6]
3. Enhance profitability due to Economic of Scale
Through M&A, production volume may grow, resulting in a decrease in production costs without an increase in fixed costs. The unit cost of manufacturing decreases as a result of the distribution of fixed expenses over a high volume of production. These economies of scale grow as a result of more intensive use of integrated manufacturing capacities, research and development facilities, etc.
4. Increase in Market power and Market Entry
Acquiring firms with strong networks for production and distribution has the benefit of boosting market strength and establishing market leadership. A foreign corporation would prefer to combine with an established local business that is well-versed in the market's dynamics and has a solid client base in order to get access to new markets.[7]Cross-border M&A is a strategy for establishing or maintaining a dominant position in such markets. For instance, Whirlpool Corporation entered the Indian market by acquiring Kelvinator India, and Vodafone acquired Hutchison Essar in order to gain entry. Thus, a factor driving cross-border M&A is an increase in market power.
5. Access to Inputs and Technology
A company may get access to raw materials, technology, cutting-edge ideas, and affordable and efficient labour easily via M&A. numerous businesses are coordinating with one another in international markets as a result of technological advancement and the high cost of research and development.
6. Global Competitiveness
Cross-border M&A is a strategy used to increase competitiveness on a global scale. Liberalisation and globalisation of economic policy compelled firms to restructure themselves through M&As. A company must be positioned so that it can compete with the best of the world in today's competitive and globalised market.[8]Business entities are driven to engage in cross-border M&A to diversify their markets and goods, decrease their reliance on exports, avoid domestic political and economic instability, and compete with international rivals in their home markets. The acquisition of Tetley Tea (Tetley Group), the second-largest tea brand in the world, by Tata Tea (TTL) is intended to increase the company's competitiveness on a global scale.
Factors to be considered in Cross-Border M&As
If the goals of the firms involved are to be completely realised, several success factors for cross-border M&As must be carefully examined. The way business is done on either side of the borders where the M&As are to take place must differ logically.
Some of the factors that must be taken into account while initiating and carrying out cross-border M&As. These consist of:
1. Proper Management:
Cross-border M&As shouldn't be frightening, according to Mark Jamrozinski. The introduction of appropriate management methods should get rid of the terrifying part of M&As. Cross-border M&As must be conducted with competent management procedures in all areas of the firm concerned, just like any other business transaction.
There are distinct markets on both sides of the border where these cross-border M&As are to occur, with primarily distinct demands and structures. Therefore, it is essential that the management strategies put in place include instructions on how to carry out a thorough market analysis before the cross-border M&A exercise takes effect. It is necessary that this market study adopt a comparative methodology in order to properly analyse both of the concerned businesses' markets and then make comparisons to illuminate their structures and demands. Only after a thorough market analysis has been conducted, proper management can be achieved.
2. Cultural Integration:
In cross-border M&As, the issue of culture is usually complicated. According to Zhang Rong, cross-border M&As are typically expensive business deals involving many different cultures. In cross-border transactions, the term "culture" provokes a variety of definitions from the players involved. Most often, players from one side of the border will have different opinions on the business culture than players from the other side of the border, who will have their own opinions as well. It will be a mistake to engage in a cross-border M&A operation without thoroughly integrating these divergent perspectives on corporate culture, which also includes the various business and market philosophies held by the two or more merging enterprises.
3. Business Policies:
Each nation has its own set of business policies. These policies frequently specify how business should be made in particular locations. How well or poorly a company does in the markets of these nations is determined by the policies. For instance, in cross-border M&As, the businesses engaged, come from various nations, each with its own set of business regulations. For example, if business A has always operated in a particular nation, it may have learnt how to adjust to that nation's set of policy requirements in order to achieve its own goals. The situation is the same for company B, which has been active in a certain nation. Business objectives may be hampered when these two firms join and begin operating in any of the concerned countries since one of the enterprises may not have successfully adopted the new policies in this new country.
4. Taxation
One of the most difficult problems in running a business is taxation. In cross-border M&As, the taxation issues are magnified. The acquiring company will have to pay higher tax rates than its rivals which would be regarded as local enterprises since it operates in a foreign country. In cross-border M&As, the different tax rates between local and foreign-owned businesses frequently work against the goals of the acquiring corporation. Realizing sustainable profitability is always elusive as long as there is an unfair playground when it comes to tax payments to the authorities of the country where the transaction is to take place. Therefore, before engaging in cross-border M&As, it becomes crucial that the taxation component of business be carefully studied.
5. General Business Conditions in the Country
The majority of the time, a variety of factors in the nations where the firm has been established will decide its ability to succeed. Conditions like assurance of security and the availability of trustworthy and efficient insurance policies and plans should be extensively considered. With the significant financial investments made during cross-border M&A transactions, it is paramount that these standards be met as soon as possible. In cross-border M&As, delays in the provision of these beneficial pro-business conditions could have severe effects on the acquiring company. The significant resources invested in the cross-border M&A process should ensure their protection at all times and any potential threat to such an enterprise should be thoroughly investigated.[9]
Legal Procedure for Cross Border M&A Deals in India
The laws that regulate cross-border M&As in India are as follows:
The Companies Act, 2013
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
The Competition Act 2002
The Insolvency and Bankruptcy Code, 2016
The Income Tax Return Act, 1961
The Department of Industrial Policy and Promotion (DIPP) Guidelines
The Transfer of Property Act, 1882
The Indian Stamp Act, 1899
The Foreign Exchange Management Act, 1999 (FEMA).
Additionally, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (the FDI Regulations) and Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 are also applicable over M&As in India.
Recently, the Reserve Bank of India also issued the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 under FEMA. In relation to inward and outward cross-border M&As in India, these regulations set forth the provisions relating to mergers, amalgamations, demergers, arrangements, etc. between foreign firms and Indian companies.[10]
Advantages of Cross Border M&A
Following are the various benefits of a cross-border M&A transaction:
1. New Opportunities
Compared to founding a new company, a merger or acquisition saves time and money. Identifying the best firms to buy and expand in an area where the company already has an established client base helps with finding a suitable market abroad. This is a rather simple method for generating growth and attracting new clients. Smaller nations are frequently excellent markets for business development.
2. Access to Talent
A firm that combines with or acquires another firm also takes on that firm's talent. This can be a huge benefit to the company as it has had trouble finding critical personnel in its native nation. When it comes to training new team members, it can also save a significant amount of money and effort.
3. Diversification
Cross-border mergers and acquisitions can aid a company in growing its product or service range, and, consequently, its market share. This might be crucial when looking for new inventions and technologies to bolster existing revenue streams and build new ones.
4. Tax Advantages
Some nations provide tax benefits following a merger or an acquisition. Additionally, significant tax benefits may be provided by international revenue streams or even by moving the headquarters of the company. However, as tax law differs from region to region, rigorous investigation or professional assistance is required.
5. Distribution
In the local market, a company can have the most robust distribution network. When a company transacts across international borders, it can quickly grow its distribution network as opposed to trying to enter new markets on its own.
6. Cost Savings
Building new facilities for a new firm is expensive. It may be significantly less expensive to collaborate with a foreign company that already has the necessary infrastructure than to expand the primary business. In comparison to acquiring an established company with facilities in the home country, it might also be a significant cost-saving solution, depending on the country.
7. Intellectual Property
A company may gain a significant competitive edge by purchasing a foreign company that possesses patented technologies as the global economy gets more inventive.
8. Production Capacity
The construction of a production capacity is expensive and time-consuming. A business might not be able to satisfy demand if it rises quickly. However, it may secure the production capacity through a global agreement, which enables it to do so far more swiftly than attempting to meet the demand alone.
9. More Financial Power
Cross-border M&A transactions allow the businesses involved to develop. The revenue earned can be used to increase financial power by combining the earnings of the two businesses. Therefore, having more financial power also results in less competition and more control over clients.[11]
Risks and Challenges faced by Companies in Cross Border M & A Transactions
Significant corporate profits and cash balance have encouraged businesses to consider the launching pad of global growth and diverse business venture development options. Cross-border transactions can speed up time to market, increase access, scale, and brand recognition, and reduce competition moves, among other benefits.
However, gains come with inherent dangers, just like with every strategic choice. Numerous corporations have discovered to their cost that not all jurisdictions provide the strict legal safeguards they might have envisioned in their native countries. Although they are aware of the benefits of doing business internationally, some companies are nevertheless hesitant to grow; they would prefer to keep a small portion of their profits domestically than lose a greater portion abroad. The specific difficulties that develop during such transactions are as follows:
Governments all across the world are enforcing more strict tax regulations to collect corporate taxpayers' returns. Financial data is being transmitted across borders more frequently than ever before to aid tax authorities in enhancing enforcement and ensuring international tax cooperation:
1. Tax Law
Governments all across the world are enforcing more strict tax regulations to collect corporate taxpayers' returns. Financial data is being transmitted across borders more frequently than ever before to aid tax authorities in enhancing enforcement and ensuring international tax cooperation. Uncertainty, tax policy affects both domestic transactions and cross-border mergers in emerging nations.
2. Political Stability
Investors and private equity firms are increasingly utilizing emerging regions' higher growth potential. Although these fast-growing M&A sectors frequently provide the highest returns, they also carry the biggest integrity risks:
· Political stability and leadership uncertainty
· Protectionist approach and political burdens
· Bribery and corruption
· Over-regulation
· Scant protection of the economic rights of foreign investors
3. Regulatory
The regulatory environment of a target was listed as the top risk by 32% of the 500 executives surveyed in the Deloitte report Cross-Border M&A: Springboard to Global Growth. Some people may be deterred from entering into these kinds of deals by the lack of regulatory certainty and the strict regulatory restrictions. For instance, American company executives can be discouraged by the intricacy of rules in the Asia-Pacific area, particularly those who are accustomed to a relaxed atmosphere.
Due diligence must be honed in accordance with the specific anti-bribery, anti-money laundering, and other legislation that must be taken into account in each nation to minimize the regulatory risks.
4. Culture and Talent
The M&A process necessitate a quick and successful post-merger integration following the conclusion of cross-border transactions. It is both exciting and challenging to combine the talent and culture of the target and acquirer across borders. Along with the obvious linguistic and religious distinctions, heritage has an impact on organization culture. Some of them contrast intuitive instincts with scientific, data-driven approaches and an authoritative structure with one that encourages dissent.
5. Business Risk
Mergers typically come with business risk, notwithstanding how advantageous they are for business. The availability, reliability, and quality of the target's financial data are issues specific to cross-border transactions. Finding trustworthy, reliable partners might be difficult, but the rewards can be great if it may happen.[12]
Legal Risks involved in Cross Border M & A
Companies seeking M&As must consider the complexity of addressing the many legal and regulatory challenges they will likely encounter. Security, corporate, and competition laws inevitably differ from one another. Losses incurred as a result of unforeseen control and sanctions are referred to as legal risks. This occurs primarily as a result of the company not understanding the pertinent legislation of the host country following the success of M&As. This indicates that the legal risk has been there throughout the cross-border transaction process ever since the host country's foreign capital M&A.
When two organisations from separate countries merge, they must follow the laws, norms, and regulations which differ considerably from one country to another, making the entire process more difficult and dangerous.[13]In some cases, a company's incompatibility with itself might lead to a standstill, as happened in the merger of Sony and Columbia Pictures.
Therefore, it is vital to review the applicable employment laws, antitrust laws, and other contractual requirements before negotiating a deal. Both throughout the negotiation phase of the contract and after it has been completed, these laws are extremely important. Reviewing these issues may reveal that the planned merger and acquisition are incompatible, so in that case, it would be advised against moving forward with the transaction.[14]
Here are some of the main challenges a company may encounter:
· A more complex and therefore costly due diligence procedure.
· More nuanced negotiations arising from possible cultural differences and approaches.
· The possible need for regulatory approval to proceed with the deal, for example, because of competition law and/or anti-trust concerns.
· A potential conflict between the respective countries’ regulatory and/or taxation regimes.
· The length and expense of compliance with the target’s regulatory regime.
· A clash of employment laws, and more stringent employment laws in the target’s country, with the potential for difficulties to arise in harmonising employment contracts.
· The need for extensive consultation with employees.
· Political challenges in the target company’s jurisdiction, and the potential for government interference.
· National or local challenge from politicians if the target provides an essential public service or a substantial number of jobs in a particular region that could complicate or scupper the deal.
· A different legal landscape in the target country could increase operating costs such that the acquisition might not be profitable in the long run.[15]
Suggestions to Reduce Risks in Cross Border M&ADeals
Cross-border M&A offers significant economic, commercial, and competitive benefits. Cross-border M&A deals frequently face significant legal, political, and regulatory hurdles; as a result, it would be wise to enlist a specialised team of corporate lawyers early on.
The executives must diligently handle the pre- and post-deal execution, plan ahead, and undertake rigorous due diligence in order to complete a cross-border acquisition successfully. The executives and deal participants should keep the following things in mind when doing a cross-border M&A:
Make sure that the whole M&A cycle is based on the deal thesis and deal objectives.
To prevent the global challenges, adapt the deal methodology and playbook whenever needed.
Combining pre-deal due diligence with pre-close planning activities to pre-empt handoff misses.
The deal structure should be such as to meet the main objectives.
Mention explicitly the overall integration scope, approach, and plan for achieving both initial and end-state goals.
Curate a global integration program that has representation from both the target and acquirer pertinent to key work streams and regions/countries.
Pay attention to efficiently planning pre and post-close integration in detail, with dependencies, and critical paths explicitly defined.
Conclusion
A company must find out an appropriate target, carry out the transaction successfully, and successfully integrate the merging legal entities in order to increase its market share in a foreign country. Even while it seems simple, there are a number of difficulties and obstacles. Companies have frequently been exposed to a variety of intricate and baffling issues as a result of this springboard of global growth, which necessitate
[1] “Critical Analysis of Risks in Cross-Border Mergers and Acquisitions” (iPleaders, June 24, 2021) <https://blog.ipleaders.in/critical-analysis-of-risks-in-cross-border-mergers-and-acquisitions/> accessed August 5, 2022. [2]Jyoti Kohli, “Cross Border Merger - Meaning, Types, Procedure & Main Rules & Regulation” (TaxGuru, July 11, 2020) <https://taxguru.in/company-law/cross-border-merger-meaning-types-procedure-main-rules-regulation.html> accessed August 5, 2022. [3]VK Bhalla, “Financial Management and Policy” (Anmol Publication Pvt Ltd, 1998) at p. 1144. [4] Jack Broyles, “Financial Management Handbook” (Grover Publishing Company Limited, 1983) at p. 378. [5] J.C. Verma, “Corporate Mergers Amalgamation and Takeovers” (Bharat Law House, 2009) at p.77. [6] Business Line Financial Daily (THE HINDU group of publication, November 10, 2004). [7] Gurminder Kaur, “Corporate Mergers and Acquisitions” (Deep and Deep Publication Pvt. Ltd., 2005) atp. 273. [8] Bhasin, “Merger and Acquisition: An Overview” (Manupatra Newslines, December 2006), Vol1, Issue7 at p. 11. [9]Cross Border Mergers and Acquisitions [10]Swarit Advisors, Shivi Gupta and Dashmeet Kaur, “Complete Guide of Cross Border Mergers and Acquisitions in India: Swarit Advisors” (Swarit Advisors, June 4, 2020) <https://swaritadvisors.com/learning/cross-border-mergers-and-acquisitions-in-india/> accessed August 7, 2022. [11]Benchmark International, “How Your Company Can Benefit From Cross-Border M&A” (How Your Company Can Benefit From Cross-border M&A) <https://blog.benchmarkcorporate.com/how-your-company-can-benefit-from-cross-border-ma> accessed August 7, 2022. [12]“Cross-Border M&A Risks and Rewards | Deloitte US” (Deloitte United States, March 9, 2017) <https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/cross-border-m-and-a-risks-rewards.html> accessed August 7, 2022. [13]“The Reality of Cross-Border Mergers and Acquisitions” (Simer - The M&A critic, January 30, 2017) <https://simerkukreja.wordpress.com/2017/01/30/the-reality-of-cross-border-mergers-and-acquisitions/> accessed August 8, 2022. [14]“Critical Analysis of Risks in Cross-Border Mergers and Acquisitions - iPleaders” (iPleaders, June 24, 2021) <https://blog.ipleaders.in/critical-analysis-of-risks-in-cross-border-mergers-and-acquisitions/> accessed August 8, 2022. [15]“Cross Border Mergers and Acquisitions: What Are the Legal Issues?” (Harper James, October 2, 2020) <https://harperjames.co.uk/article/cross-border-mergers-and-acquisitions/> accessed August 8, 2022.Abstract
A few decades ago, the concept of Merger and Acquisition (M&A) was known by no one. But, over the last few decades, M&A evolved as one of the most accepted business tools used by companies to secure their existence in the competitive market and boost their growth. M&A is a great way to boost a company’s growth. As a result of globalisation and advancement of technology, M&A has gained potential importance in the business world. In the initial stage, M&A deals were limited to only one country, i.e., the companies from the same country were being acquired and merged. But, with the flow of time, M&A has gone international, i.e., companies from different countries are being acquired and merged. This concept is known as ‘Cross-Border Merger & Acquisition’. Cross-border M&A is a great way for companies to enter the international market and expand their growth and capacity. But, like any other strategic tool, the concept of ‘Cross-Border Merger & Acquisition’ has some difficulties and challenges as well. This article lays down the understanding of cross-border M&A issues, particularly legal issues and their solutions, as well as the idea of cross-border M&A have been addressed.
Keywords: Merger, Acquisition, Cross border.
Introduction
Economists may refer to this century as the age of Mergers and Acquisitions (M&As). Globalization is now a crucial aspect of the economy. Due to the increased cost pressure and stiffer competition, the methods developed at the multinational level had to be adopted. This has happened to medium-sized businesses as well as big corporations.
A company can encourage growth and raise its shareholder value through M&A. As a result, it is essential to the arsenal of a firm. The M&A world have become international over the past twenty years. It is no longer limited to the only domestic or local market. Companies of today prefer to look for targets in farther-flung regions. There are many chances for acquirers in Asia, the Middle East, and Latin America as a result of the rapid growth of these nations. Acquirers in these areas also transform regional businesses into independent acquirers. Cross-border M&A is the term used when a company looks for targets in another country. Particularly cross-border M&A might serve as a springboard for a business striving for long-term growth and profitability.
A cross-border transaction involves several intricate and frequently perplexing considerations. Therefore, overcoming these obstacles is necessary for a cross-border transaction to be successful. Elite U.S. participants in this market believe that successful transactions are feasible as a result of advanced planning, logical strategies, and deal structures that anticipate potential problems and worries. Legal difficulties (and other issues) must be recognized early on and addressed, or in some circumstances even resolved, for an inbound or outbound transaction to be successful.[1]
What is Cross Border M&A?
In simple words, a cross-border merger occurs when two companies with different geographic locations join forces to form a third company. A company from a different country may purchase a company from another country. In the case of cross-border M&As, they are mergers or acquisitions by investors from outside the country.
In a cross-border merger, control and power over the merged or acquired company will be transferred and the assets and liabilities of the two companies from two different countries are combined into a new legal entity. While in a cross-border acquisition, the local company's assets and liabilities are transformed into those of a foreign company (foreign investor) and the local company is subsequently affiliated.[2]
Reasons for Cross- border M&As
Cross-border mergers and acquisitions might be thought of as a sort of hybrid between a domestic and foreign firm. They help companies in expanding into international markets, improving their capacity to compete in the global market. Following are some causes for cross-border M&As:
1. Growth
Growth and expansion through M&As take less time and are more cost-effective. The company may quickly accomplish the same goal by M&A with an established corporation rather than going through the time-consuming process of internal expansion or diversification. Such a plan is frequently less expensive than the option of building the required production capacity and competency.[3]Building new facilities takes time, thus it can be more beneficial to buy the current facilities of another firm.[4]
2. Synergy
Synergy is defined as the cooperation of two undertakings. When two undertakings pool their resources and efforts, they may achieve greater success than if they operated individually because they can save money on operating expenses, such as by combining their sales offices, staff accommodation, plant management, etc.[5]For instance, Jiangling Motor Company Group (JMCG) was acquired by Mahindra & Mahindra Ltd (M&M), which will facilitate the company's entry into the tractor manufacturing industry.[6]
3. Enhance profitability due to Economic of Scale
Through M&A, production volume may grow, resulting in a decrease in production costs without an increase in fixed costs. The unit cost of manufacturing decreases as a result of the distribution of fixed expenses over a high volume of production. These economies of scale grow as a result of more intensive use of integrated manufacturing capacities, research and development facilities, etc.
4. Increase in Market power and Market Entry
Acquiring firms with strong networks for production and distribution has the benefit of boosting market strength and establishing market leadership. A foreign corporation would prefer to combine with an established local business that is well-versed in the market's dynamics and has a solid client base in order to get access to new markets.[7]Cross-border M&A is a strategy for establishing or maintaining a dominant position in such markets. For instance, Whirlpool Corporation entered the Indian market by acquiring Kelvinator India, and Vodafone acquired Hutchison Essar in order to gain entry. Thus, a factor driving cross-border M&A is an increase in market power.
5. Access to Inputs and Technology
A company may get access to raw materials, technology, cutting-edge ideas, and affordable and efficient labour easily via M&A. numerous businesses are coordinating with one another in international markets as a result of technological advancement and the high cost of research and development.
6. Global Competitiveness
Cross-border M&A is a strategy used to increase competitiveness on a global scale. Liberalization and globalization of economic policy compelled firms to restructure themselves through M&As. A company must be positioned so that it can compete with the best of the world in today's competitive and globalised market.[8]Business entities are driven to engage in cross-border M&A to diversify their markets and goods, decrease their reliance on exports, avoid domestic political and economic instability, and compete with international rivals in their home markets. The acquisition of Tetley Tea (Tetley Group), the second-largest tea brand in the world, by Tata Tea (TTL) is intended to increase the company's competitiveness on a global scale.
Factors to be considered in Cross-Border M&As
If the goals of the firms involved are to be completely realised, several success factors for cross-border M&As must be carefully examined. The way business is done on either side of the borders where the M&As are to take place must differ logically.
Some of the factors that must be taken into account while initiating and carrying out cross-border M&As. These consist of:
1. Proper Management:
Cross-border M&As shouldn't be frightening, according to Mark Jamrozinski. The introduction of appropriate management methods should get rid of the terrifying part of M&As. Cross-border M&As must be conducted with competent management procedures in all areas of the firm concerned, just like any other business transaction.
There are distinct markets on both sides of the border where these cross-border M&As are to occur, with primarily distinct demands and structures. Therefore, it is essential that the management strategies put in place include instructions on how to carry out a thorough market analysis before the cross-border M&A exercise takes effect. It is necessary that this market study adopt a comparative methodology in order to properly analyse both of the concerned businesses' markets and then make comparisons to illuminate their structures and demands. Only after a thorough market analysis has been conducted, proper management can be achieved.
2. Cultural Integration:
In cross-border M&As, the issue of culture is usually complicated. According to Zhang Rong, cross-border M&As are typically expensive business deals involving many different cultures. In cross-border transactions, the term "culture" provokes a variety of definitions from the players involved. Most often, players from one side of the border will have different opinions on the business culture than players from the other side of the border, who will have their own opinions as well. It will be a mistake to engage in a cross-border M&A operation without thoroughly integrating these divergent perspectives on corporate culture, which also includes the various business and market philosophies held by the two or more merging enterprises.
3. Business Policies:
Each nation has its own set of business policies. These policies frequently specify how business should be made in particular locations. How well or poorly a company does in the markets of these nations is determined by the policies. For instance, in cross-border M&As, the businesses engaged, come from various nations, each with its own set of business regulations. For example, if business A has always operated in a particular nation, it may have learnt how to adjust to that nation's set of policy requirements in order to achieve its own goals. The situation is the same for company B, which has been active in a certain nation. Business objectives may be hampered when these two firms join and begin operating in any of the concerned countries since one of the enterprises may not have successfully adopted the new policies in this new country.
4. Taxation
One of the most difficult problems in running a business is taxation. In cross-border M&As, the taxation issues are magnified. The acquiring company will have to pay higher tax rates than its rivals which would be regarded as local enterprises since it operates in a foreign country. In cross-border M&As, the different tax rates between local and foreign-owned businesses frequently work against the goals of the acquiring corporation. Realizing sustainable profitability is always elusive as long as there is an unfair playground when it comes to tax payments to the authorities of the country where the transaction is to take place. Therefore, before engaging in cross-border M&As, it becomes crucial that the taxation component of business be carefully studied.
5. General Business Conditions in the Country
The majority of the time, a variety of factors in the nations where the firm has been established will decide its ability to succeed. Conditions like assurance of security and the availability of trustworthy and efficient insurance policies and plans should be extensively considered. With the significant financial investments made during cross-border M&A transactions, it is paramount that these standards be met as soon as possible. In cross-border M&As, delays in the provision of these beneficial pro-business conditions could have severe effects on the acquiring company. The significant resources invested in the cross-border M&A process should ensure their protection at all times and any potential threat to such an enterprise should be thoroughly investigated.[9]
Legal Procedure for Cross Border M&A Deals in India
The laws that regulate cross-border M&As in India are as follows:
The Companies Act, 2013
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
The Competition Act 2002
The Insolvency and Bankruptcy Code, 2016
The Income Tax Return Act, 1961
The Department of Industrial Policy and Promotion (DIPP) Guidelines
The Transfer of Property Act, 1882
The Indian Stamp Act, 1899
The Foreign Exchange Management Act, 1999 (FEMA).
Additionally, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (the FDI Regulations) and Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 are also applicable over M&As in India.
Recently, the Reserve Bank of India also issued the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 under FEMA. In relation to inward and outward cross-border M&As in India, these regulations set forth the provisions relating to mergers, amalgamations, demergers, arrangements, etc. between foreign firms and Indian companies.[10]
Advantages of Cross Border M&A
Following are the various benefits of a cross-border M&A transaction:
1. New Opportunities
Compared to founding a new company, a merger or acquisition saves time and money. Identifying the best firms to buy and expand in an area where the company already has an established client base helps with finding a suitable market abroad. This is a rather simple method for generating growth and attracting new clients. Smaller nations are frequently excellent markets for business development.
2. Access to Talent
A firm that combines with or acquires another firm also takes on that firm's talent. This can be a huge benefit to the company as it has had trouble finding critical personnel in its native nation. When it comes to training new team members, it can also save a significant amount of money and effort.
3. Diversification
Cross-border mergers and acquisitions can aid a company in growing its product or service range, and, consequently, its market share. This might be crucial when looking for new inventions and technologies to bolster existing revenue streams and build new ones.
4. Tax Advantages
Some nations provide tax benefits following a merger or an acquisition. Additionally, significant tax benefits may be provided by international revenue streams or even by moving the headquarters of the company. However, as tax law differs from region to region, rigorous investigation or professional assistance is required.
5. Distribution
In the local market, a company can have the most robust distribution network. When a company transacts across international borders, it can quickly grow its distribution network as opposed to trying to enter new markets on its own.
6. Cost Savings
Building new facilities for a new firm is expensive. It may be significantly less expensive to collaborate with a foreign company that already has the necessary infrastructure than to expand the primary business. In comparison to acquiring an established company with facilities in the home country, it might also be a significant cost-saving solution, depending on the country.
7. Intellectual Property
A company may gain a significant competitive edge by purchasing a foreign company that possesses patented technologies as the global economy gets more inventive.
8. Production Capacity
The construction of a production capacity is expensive and time-consuming. A business might not be able to satisfy demand if it rises quickly. However, it may secure the production capacity through a global agreement, which enables it to do so far more swiftly than attempting to meet the demand alone.
9. More Financial Power
Cross-border M&A transactions allow the businesses involved to develop. The revenue earned can be used to increase financial power by combining the earnings of the two businesses. Therefore, having more financial power also results in less competition and more control over clients.[11]
Risks and Challenges faced by Companies in Cross Border M & A Transactions
Significant corporate profits and cash balance have encouraged businesses to consider the launching pad of global growth and diverse business venture development options. Cross-border transactions can speed up time to market, increase access, scale, and brand recognition, and reduce competition moves, among other benefits.
However, gains come with inherent dangers, just like with every strategic choice. Numerous corporations have discovered to their cost that not all jurisdictions provide the strict legal safeguards they might have envisioned in their native countries. Although they are aware of the benefits of doing business internationally, some companies are nevertheless hesitant to grow; they would prefer to keep a small portion of their profits domestically than lose a greater portion abroad. The specific difficulties that develop during such transactions are as follows:
Governments all across the world are enforcing more strict tax regulations to collect corporate taxpayers' returns. Financial data is being transmitted across borders more frequently than ever before to aid tax authorities in enhancing enforcement and ensuring international tax cooperation:
1. Tax Law
Governments all across the world are enforcing more strict tax regulations to collect corporate taxpayers' returns. Financial data is being transmitted across borders more frequently than ever before to aid tax authorities in enhancing enforcement and ensuring international tax cooperation. Uncertainty, tax policy affects both domestic transactions and cross-border mergers in emerging nations.
2. Political Stability
Investors and private equity firms are increasingly utilizing emerging regions' higher growth potential. Although these fast-growing M&A sectors frequently provide the highest returns, they also carry the biggest integrity risks:
· Political stability and leadership uncertainty
· Protectionist approach and political burdens
· Bribery and corruption
· Over-regulation
· Scant protection of the economic rights of foreign investors
3. Regulatory
The regulatory environment of a target was listed as the top risk by 32% of the 500 executives surveyed in the Deloitte report Cross-Border M&A: Springboard to Global Growth. Some people may be deterred from entering into these kinds of deals by the lack of regulatory certainty and the strict regulatory restrictions. For instance, American company executives can be discouraged by the intricacy of rules in the Asia-Pacific area, particularly those who are accustomed to a relaxed atmosphere.
Due diligence must be honed in accordance with the specific anti-bribery, anti-money laundering, and other legislation that must be taken into account in each nation to minimize the regulatory risks.
4. Culture and Talent
The M&A process necessitate a quick and successful post-merger integration following the conclusion of cross-border transactions. It is both exciting and challenging to combine the talent and culture of the target and acquirer across borders. Along with the obvious linguistic and religious distinctions, heritage has an impact on organization culture. Some of them contrast intuitive instincts with scientific, data-driven approaches and an authoritative structure with one that encourages dissent.
5. Business Risk
Mergers typically come with business risk, notwithstanding how advantageous they are for business. The availability, reliability, and quality of the target's financial data are issues specific to cross-border transactions. Finding trustworthy, reliable partners might be difficult, but the rewards can be great if it may happen.[12]
Legal Risks involved in Cross Border M & A
Companies seeking M&As must consider the complexity of addressing the many legal and regulatory challenges they will likely encounter. Security, corporate, and competition laws inevitably differ from one another. Losses incurred as a result of unforeseen control and sanctions are referred to as legal risks. This occurs primarily as a result of the company not understanding the pertinent legislation of the host country following the success of M&As. This indicates that the legal risk has been there throughout the cross-border transaction process ever since the host country's foreign capital M&A.
When two organisations from separate countries merge, they must follow the laws, norms, and regulations which differ considerably from one country to another, making the entire process more difficult and dangerous.[13]In some cases, a company's incompatibility with itself might lead to a standstill, as happened in the merger of Sony and Columbia Pictures.
Therefore, it is vital to review the applicable employment laws, antitrust laws, and other contractual requirements before negotiating a deal. Both throughout the negotiation phase of the contract and after it has been completed, these laws are extremely important. Reviewing these issues may reveal that the planned merger and acquisition are incompatible, so in that case, it would be advised against moving forward with the transaction.[14]
Here are some of the main challenges a company may encounter:
· A more complex and therefore costly due diligence procedure.
· More nuanced negotiations arising from possible cultural differences and approaches.
· The possible need for regulatory approval to proceed with the deal, for example, because of competition law and/or anti-trust concerns.
· A potential conflict between the respective countries’ regulatory and/or taxation regimes.
· The length and expense of compliance with the target’s regulatory regime.
· A clash of employment laws, and more stringent employment laws in the target’s country, with the potential for difficulties to arise in harmonising employment contracts.
· The need for extensive consultation with employees.
· Political challenges in the target company’s jurisdiction, and the potential for government interference.
· National or local challenge from politicians if the target provides an essential public service or a substantial number of jobs in a particular region that could complicate or scupper the deal.
· A different legal landscape in the target country could increase operating costs such that the acquisition might not be profitable in the long run.[15]
Suggestions to Reduce Risks in Cross Border M&ADeals
Cross-border M&A offers significant economic, commercial, and competitive benefits. Cross-border M&A deals frequently face significant legal, political, and regulatory hurdles; as a result, it would be wise to enlist a specialised team of corporate lawyers early on.
The executives must diligently handle the pre- and post-deal execution, plan ahead, and undertake rigorous due diligence in order to complete a cross-border acquisition successfully. The executives and deal participants should keep the following things in mind when doing a cross-border M&A:
Make sure that the whole M&A cycle is based on the deal thesis and deal objectives.
To prevent the global challenges, adapt the deal methodology and playbook whenever needed.
Combining pre-deal due diligence with pre-close planning activities to pre-empt handoff misses.
The deal structure should be such as to meet the main objectives.
Mention explicitly the overall integration scope, approach, and plan for achieving both initial and end-state goals.
Curate a global integration program that has representation from both the target and acquirer pertinent to key work streams and regions/countries.
Pay attention to efficiently planning pre and post-close integration in detail, with dependencies, and critical paths explicitly defined.
Conclusion
A company must find out an appropriate target, carry out the transaction successfully, and successfully integrate the merging legal entities in order to increase its market share in a foreign country. Even while it seems simple, there are a number of difficulties and obstacles. Companies have frequently been exposed to a variety of intricate and baffling issues as a result of this springboard of global growth, which necessitate
[1] “Critical Analysis of Risks in Cross-Border Mergers and Acquisitions” (iPleaders, June 24, 2021) <https://blog.ipleaders.in/critical-analysis-of-risks-in-cross-border-mergers-and-acquisitions/> accessed August 5, 2022. [2]Jyoti Kohli, “Cross Border Merger - Meaning, Types, Procedure & Main Rules & Regulation” (TaxGuru, July 11, 2020) <https://taxguru.in/company-law/cross-border-merger-meaning-types-procedure-main-rules-regulation.html> accessed August 5, 2022. [3]VK Bhalla, “Financial Management and Policy” (Anmol Publication Pvt Ltd, 1998) at p. 1144. [4] Jack Broyles, “Financial Management Handbook” (Grover Publishing Company Limited, 1983) at p. 378. [5] J.C. Verma, “Corporate Mergers Amalgamation and Takeovers” (Bharat Law House, 2009) at p.77. [6] Business Line Financial Daily (THE HINDU group of publication, November 10, 2004). [7] Gurminder Kaur, “Corporate Mergers and Acquisitions” (Deep and Deep Publication Pvt. Ltd., 2005) atp. 273. [8] Bhasin, “Merger and Acquisition: An Overview” (Manupatra Newslines, December 2006), Vol1, Issue7 at p. 11. [9]Cross Border Mergers and Acquisitions [10]Swarit Advisors, Shivi Gupta and Dashmeet Kaur, “Complete Guide of Cross Border Mergers and Acquisitions in India: Swarit Advisors” (Swarit Advisors, June 4, 2020) <https://swaritadvisors.com/learning/cross-border-mergers-and-acquisitions-in-india/> accessed August 7, 2022. [11]Benchmark International, “How Your Company Can Benefit From Cross-Border M&A” (How Your Company Can Benefit From Cross-border M&A) <https://blog.benchmarkcorporate.com/how-your-company-can-benefit-from-cross-border-ma> accessed August 7, 2022. [12]“Cross-Border M&A Risks and Rewards | Deloitte US” (Deloitte United States, March 9, 2017) <https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/cross-border-m-and-a-risks-rewards.html> accessed August 7, 2022. [13]“The Reality of Cross-Border Mergers and Acquisitions” (Simer - The M&A critic, January 30, 2017) <https://simerkukreja.wordpress.com/2017/01/30/the-reality-of-cross-border-mergers-and-acquisitions/> accessed August 8, 2022. [14]“Critical Analysis of Risks in Cross-Border Mergers and Acquisitions - iPleaders” (iPleaders, June 24, 2021) <https://blog.ipleaders.in/critical-analysis-of-risks-in-cross-border-mergers-and-acquisitions/> accessed August 8, 2022. [15]“Cross Border Mergers and Acquisitions: What Are the Legal Issues?” (Harper James, October 2, 2020) <https://harperjames.co.uk/article/cross-border-mergers-and-acquisitions/> accessed August 8, 2022.