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Cross Border Mergers and Acquisitions over the years – A Critical Study

Mergers and Acquisitions
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Over the last few decades, the globalization of business has created a global search for competitive advantage. As a result of the challenges of gaining scale in a quickly consolidated global economy, companies have followed their consumers who are becoming worldwide. Globalization has sparked an unprecedented spike in cross-border merger and acquisition activity, thanks to a mix of factors including increased deregulation, privatization, and corporate restructuring. Mergers and acquisitions across borders have become commonplace in the global commercial scene.

The term “cross-border M&A,” sometimes known as “overseas merger and acquisition,” refers to a transaction involving two or more companies situated in separate countries. The assets and operations of the merging companies are combined in this agreement in order to form a new legal entity. It results in a local company’s assets and operations being transferred to a former company, with the former becoming an affiliate of the latter. M&A is a strategy for a company’s expansion and increased shareholder value. As a result, it is an important part of a company’s arsenal. A cross-border M&A is when a corporation looks for targets in another country and in particular, it can serve as a springboard for a company seeking long-term growth and prosperity. On this premise, cross-border M&A can be divided into two categories: inbound, where foreign companies invest in India, and outbound, where Indian companies invest abroad.

Laws applicable over Overseas Mergers and Acquisitions

The laws that regulate cross border mergers and acquisitions in India are as follows:

The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (the FDI Regulations) and the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (the FDI Regulations) also apply to mergers and acquisitions in India. The Reserve Bank of India also announced the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 under the Foreign Exchange Management Act (FEMA). These regulations set out the rules for inward and outward cross-border mergers and acquisitions in India, including mergers, amalgamations, demergers, and other arrangements involving foreign and Indian enterprises.

Benefits of Cross Border Mergers and Acquisitions

Foreign Investment

Given that many domestic enterprises in many emerging economies exaggerate their capabilities in order to attract M&A, international corporations must conduct due diligence before entering into an M&A agreement with a domestic firm. This is why many overseas companies seek the advice of management consultancies and investment banks before embarking on an M&A transaction. Cross border M&A has many benefits as follows: 

  • Elevation in Capital
    Cross-border mergers and acquisitions greatly increase a company’s capital, allowing it to operate more smoothly in the long run. It permits the new business to extend its activities as needed, purchase additional land, purchase additional facilities and machines, enhance its products and services, and much more. It also enables businesses to exchange intangible assets including technology and intellectual property such as trademarks, copyright, and patents
  • Generation of Employment opportunities
    Companies can eventually start recruiting additional people as a result of cross-border mergers and acquisitions. Companies formed as a result of cross-border mergers and acquisitions create additional job possibilities in the long run as they extend their activities.
  • Technology Exchange 
    When two companies merge or acquire each other, their technical know-how is also shared. They can exchange their management and operational plans, intellectual property rights, risk management, planning tactics, and so on. This leads to increased invention and product creation in the host country, both directly and indirectly.

In addition, it facilitates faster and easier entry into new markets, an increase of brand recognition across many regions, and the acquisition of a competitor. By expanding sales, a company might become more cost-effective by acquiring a new market. Furthermore, new markets provide a fresh client base and aid in speedier scaling.

The Issues

Rewards, like any strategic decision, come with a set of risks. Tax is a significant concern due to the fact that each country’s tax regulations vary. At first, obtaining tax security appears to be arduous, yet being caught off guard by tax restrictions can be extremely costly. Other countries have distinct restrictions for products, operational management, human resources, and so on, in addition to tax regulations. This danger necessitates a thorough examination of the target’s regulatory environment. Not only in developing countries, but even in mature states, a country’s political stability might begin to sway, especially when the government changes. Differences in culture and talent should not be overlooked in addition to “real” facts

As a result of these risks, acquiring organizations may need to rethink their risk perceptions and traditional due diligence processes in order to meet both common and unique risk concerns associated with cross-border M&A transactions. Common risk variables to consider include national and regional tax laws; the target’s availability, accuracy, and reliability; the company’s financial information; the country’s political stability, and the target’s compliance with needed rules. 

In addition, some geographical areas necessitate a thorough examination of political and security risks. Terrorism, political unrest, corruption, and kidnapping are all issues that need to be addressed. As acquirers go to emerging economies for raw materials, low-cost production, and new markets, all of these challenges may need to be considered. The disadvantage of these perils is obvious, but in some parts of Africa, Latin America, the Middle East, Asia, and Eastern Europe, uncertainty presents an opportunity for those willing to take measured risks. Collaboration with experienced local advisers might mean the difference between success and failure.

According to the survey conducted by the Economist Intelligence Unit in 2008, although weak infrastructure, regulatory obstacles, and interdepartmental fighting will limit the pace of opening in many areas, India’s potential to attract more FDI inflows is immense. Infrastructure, energy, telecommunications, information technology, and insurance are projected to be the most attractive industries for foreign direct investment. Producers and assemblers of automobiles and automotive components, as well as biotechnology companies, are re-evaluating India’s potential. The availability of a trained, English-speaking workforce has attracted major investment, notably in the IT sector. Despite the perceived risks of investing in this region, the vast amount of M&A activity indicates that the projected return is substantially higher. 

Effect of the Pandemic on Mergers and Acquisitions

Tax

A decade later, according to the UN, the FDI into India rose almost by 13% in 2020 thanks to the interest in the digital sector. Although many of the major economies like the US, UK, and Russia saw a declined fund flow due to the COVID-19 pandemic, India and China defied the trend. The largest contributor to the 13% rise in FDI in India was the cross-border M&A which grew 83% percent to USD 27 billion because of Facebook’s acquisition of a 9.9% stake in Reliance Jio platforms via a new entity called Jaadhu Holdings LLC Infrastructure.

Despite the COVID wave M&As again rose 8% to 32.3 billion till April of 2021. Cross-border transactions increased by 4% to USD 14.3 billion over 124 transactions, while strategic transactions fell by 3% to USD 26.4 billion across 338 transactions. According to Grant Thornton Bharat Dealtracker, roughly 597 agreements worth $30 billion were announced in the third quarter of 2021 (July-September 2021), an increase of 31%. According to Shanthi Vijetha, Partner, Grant Thornton Bharat, the year saw an increase in each quarter, and the trend is projected to continue in the following quarters. The monthly increase in services and manufacturing activities was accompanied by a decrease in new COVID-19 cases and an increase in the rate across the country.

Conclusion

When successful industrial restructuring leads to improved efficiency without undue market concentration, cross-border mergers and acquisitions can pay off in terms of corporate performance and profitability, as well as benefits for home and host nations. The benefits of such mergers and acquisitions are becoming increasingly intangible, manifesting themselves as economy-wide spill-over effects. They can assist in the revitalization of failing businesses and local economies, as well as the creation of jobs, through the restructuring process, technology acquisition, and product development. In the international market, Indian enterprises have a substantial presence. Their acquisition and merger plans are aimed at strengthening their position in the worldwide market.

India is no longer seen as a submissive country, but as a strong and developing economy in the globe, owing to this trend of Indian corporations acquiring foreign companies. The rising involvement of Indian enterprises in global markets, particularly in the United States, reflects not only the maturity of Indian industry but also their level of participation in the globalization process. Moreover, in the COVID times, corporate mergers and acquisitions have seen a tremendous transformation as a result of the ongoing pandemic difficulties, opening the floodgates for strategic agreements — whether mainstream, cross-border or cross-sector. Mergers and acquisitions are inherently exploratory processes for new business prospects. M&A possibilities have changed in the post-COVID world, with positive government action, a noticeable buyout stock market, and a generally stable banking sector providing a favorable atmosphere.

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