Written By: Aniruddh Singh Raghuvanshi
COLLEGE: Government New Law College, DAVV (Indore)
COURSE: BALLB (Hons.)
YEAR: 2nd Year (4th Semester)
TOPIC: Cross-Border Merger and Acquisition
❖ Synopsis
1. Introduction
2. Historical Past
3. Advantages of Cross-Border M&A
4. Disadvantages of Cross-Border M&A
5. Some Successful Examples
6. Conclusion
Cross-Border Merger and Acquisition
❖ Introduction
With an augment in the number of companies, seeking opportunities to expand their market presence, access new technologies, and achieve economies of scale, Cross-border M&A has become a prevalent phenomenon in the global business landscape. Merger and Acquisition is the most common form of the international business market, it has seen tremendous growth over the last few decades, because of globalization. Entering a local market with an entirely new culture of a new country or establishing an organization from scratch, would be a little challenging for anyone, hence businesses are opting for the new technique of expansion through merger and acquisition. When these mergers happen internationally, they are categorized as Cross-border mergers and Acquisitions.
Cross-border M&A has gained increasing prominence in the corporate world in recent years, which reflects the pursuit of growth, efficiency, and competitive advantage. It is now believed that, in an increasingly interconnected and dynamic global economy, there is a need to transcend geographical boundaries and capitalize on international opportunities, for business organizations, to grow rapidly and effectively. Hence, organizations tend to spread their business in different countries. However, the success of these new ventures always depends upon the credibility the marketplace and the business have, pertaining to a lot of factors governing this step of cross-border merger and acquisition. Cross-border M&A, once a rarity, is now a significant feature of the corporate landscape, reshaping industries, and establishing successful global conglomerates.
❖ Historical Past
In a really nut-shelled intro, it could be traced that, the history of cross-border M&A reflects, the advancement of global business and economic dynamics.
M&A activities were quite prevalent from the late 19th Century. It could be traced that the mergers happened with the existence of companies. For example, in 1821, the Hudson’s Bay Company expanded itself by merging with its rival North West Company.
Cross-border M&A in particular has gained prominence from the advent of globalization, over the last century.
▪ The emergence of Cross-Border M&A could be traced back to the late 20th century, primarily among European countries. The Companies from the UK, France, and Germany were some of the trailblazers, in the expansion of their business across borders. During this period, industrialization and colonial expansion led European companies to seek resources and markets overseas through M&A. British companies acquiring assets in India, Africa, and Southeast Asia, were the result of the above techniques only.
▪ However, the outcome of World War II marked a significant turning point in the progress of Cross-Border M&A. The war led the Europe in ruins, and the United States came out as an external source of help to rebuild Europe. They facilitated US investments in European companies and initiated the cross-border M&A to establish a global presence. That era witnessed the birth of multinational corporations (MNCs) as companies expanded their business beyond national borders to capture international markets.
▪ Between 1960s-1980s, witnessed a surge in cross-border M&A, often driven by diversification strategies. Companies expanded into unrelated industries to mitigate risks and seek new growth opportunities. There was also the development of an era of hostile takeovers and restructuring
▪ It was actually in the late 20th Century and early 21st century, that an accelerated Cross-Border M&A was witnessed, which was the result of Globalization, advances in communication and technology, and the liberalization of trade and investment policies. Microsoft’s acquisition of Nokia and Facebook’s acquisition of WhatsApp are some substantiations of the same. China and India were some emerging markets, which became significant players.
❖ Advantages
With the growth in cross-border M&A activities, a lot of advancement is also observed in the countries themselves, they tend to exchange business strategies, acquire technological ideas, diversify their portfolios, and reduce the risk exposure associated with economic downturns or industry-specific challenges. It would absolutely be true to quote that, “countries grow with their business”, particularly in these activities. Here’s an overview of some of the advantages:
➢ Increased Profitability: When the companies combine with each other and the resources from two or more (depending on the merger) are used, the resultshighlight the cost efficiencies and economies of scale, which leads to a surge in the profits earned, hence an increased profitability is achieved.
➢ Technology Acquisition: The companies gain access to the advanced technologies used by their counterparts. There is also an advantage in gaining intellectual property, and resource and development capabilities that might be challenging to develop organically. Hence, getting an edge over their contemporaries in the market.
➢ Market Expansion: One of the most crucial objectives behind this process, is the expansion of the business market of the companies. These opportunities to access new markets and customers, allow companies to diversify their revenue streams and reduce dependence on a single market. Hence it is the most crucial and significant plus point.
➢ Global Credibility: Cross-border M&A provides an instant global presence, which enables the companies to receive credibility at an international scale. Also, it enhances the company’s brand recognition. Vodafone Air Touch PLC’sacquisition of Mannesmann AG (on February 4, 2000) is evidence of the same.
➢ Tax Benefits: In some cases, cross-border M&A can also offer tax advantages. Particularly by providing lower corporate tax rates or by providing more favorable tax structures in the target country.
❖ Disadvantages
While there are many benefits of Cross-Border M&A per se, its implementation and execution are quite challenging. There are a lot of de-merits also, which encompass the whole process, hence it is necessary to get acquainted with some of its negative aspects too:
➢ Cultural Differences: The most significant de-merit of Cross-Border M&A would be the differences in the communication style, management practices, work culture, etc. Their misalignment could lead to conflicts, which could hinder the post-merger integration. Subsequently, disturbing the aim of the acquiring companies.
➢ Financial Risks: Complexity in the Cross-Border M&A deals pertaining to finance, which involve currency exchange risks, and exposure to fluctuations in interest rates, can also hinder the objective of these mergers. The company may deviate towards a High level of debt, which strains the company’s financial position.
➢ Political and Economic Risks: Political instability, also pose a threat to the successful integration of the companies. Changes in government policies and economic fluctuations in the target country can lead to significant risks to the success of the M&A deals.
➢ Regulatory Complexity: The irregular regulations and rigid regulatory framework imposed on the companies could disrupt the objectives, leading to adversity in public relations and these complexities can also lead to delays and additional costs. Unfamiliar regulatory frameworks, such as antitrust laws, tax regulations, and foreign investment rules are some examples.
➢ Lack of Local Expertise: Companies involved may also lack local market expertise, which could lead to substandard decision-making and can also underestimate market-specific challenges.
After a brief analysis of the merits and demerits of Cross-Border Merger and Acquisition, it could be concluded that though a lot of benefits are grabbed through Cross-Border Merger and Acquisition, however, it comes with a fair share of challenges and risks in the end for the Companies. To mitigate these, there is a requirement for careful planning, due diligence, and effective post-merger integration.
❖ Some Successful Integrations
A successful Cross-Border M&A deal depends on factors such as cultural sensitivity, due diligence, and proper strategies to maximize advantages and allay the disadvantages. There are the following examples of successful Cross-Border Merger and Acquisitions:
➢ AstraZeneca’s Acquisition of Alexion Pharmaceuticals in 2021
➢ Microsoft’s Acquisition of LinkedIn in 2016.
➢ The Jet-Etihad deal and the Air Asia deal particularly in the aviation sector in India.
➢ T-Mobile’s Merger with Sprint (2020) is a significant one in the telecommunication industry.
❖ Conclusion
In a nutshell, we could summarize that cross-border mergers and acquisitions (M&A) are complex strategic maneuvers that offer both advantages and disadvantages to companies seeking to expand their global presence. Cross-border mergers and acquisitions have evolved into a strategic imperative for businesses aiming to achieve a global marketplace successfully. Their successful deals depend on meticulous planning, thorough due diligence, effective post-merger integration, and adaptability to local market conditions.These mergers often accelerate growth and give international market credibility to the companies involved.
However, it cannot be denied that these actions come with some inherent challenges and risks, undermining the aim of the M&As. They pose a significant threat to the growth of the companies and also lead to disruption of the financial advantages. All these challenges are faced if a proper strategy and execution are not followed. Hence, the companies need to approach this operation carefully, before expanding their horizon of business.
Ultimately, cross-border M&A can be a powerful and significant tool for companies with a well-defined strategy and the capabilities to navigate the complexities of international business. When executed carefully, these transactions can drive innovation and contribute to a long-term success in the global marketplace.
