There have been innumerable merger and acquisitions in the past many who have been successful and others who unfortunately doomed. Recent trends show that in spite of economic uncertainties cross border merger and acquisitions are gaining importance and considered to be a vital tool for growth.
Let’s consider this example from past of Daimler-Chrysler Merger which was a cross border M&A where Daimler-Benz was a German automotive company and Chrysler Corporation an American automobile manufacturer. This German-American marriage took place in the year 1998 and was considered as a “merger of equals”.
As the word suggest cross border includes activities that take place between two different countries. Hence we could imply that the cross border merger and acquisitions are basically those transactions wherein the target firm and the acquirer firm are of different home countries. This deal is such in which the assets and processes of the firms in different countries are combined to form a new legitimate entity.
Cross border merger and acquisitions are of two types Inward and Outward. Inward cross border M&A’s involve an inward capital movement due to the sale of an domestic firm to a foreign investor conversely outward cross border M&A’s involves outward capital movement due to purchase of a foreign firm. In spite of these differences, inward and outward M&A’s are closely linked as on a whole M&A transactions comprise of both sales and purchase.
You must be wondering why firms go for cross border merger and acquisitions or what induces them to leave their home country. Well there are various driving forces which differ across sectors. Few factors which generally encourage firms for cross border M&A’s include
- Globalization of financial markets
- Market pressures and falling demand due to international competition
- Seek new market opportunities since the technology is fast evolving
- Geographical diversification which would result in exploring the assets in other countries
- Increase companies efficiency in producing the goods and services.
- Fulfillment of the objective to grow profitably
- Increase the scale of production
- Technology share and innovation which reduces costs
These factors have been supported with government policies such as regulatory reforms, privatization which has led to access to targets for potential acquisitions.
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Effects of Cross Border Merger and Acquisitions
Generally it has been observed that cross border merger and acquisitions are a restructuring of industrial assets and production structures on a worldwide basis. It enables the global transfer of technology, capital, goods and services and integrates for universal networking. Cross border M&A’s leads to economies of scale and scope which helps in gaining efficiency. Apart from this it also benefits the economy such as increased productivity of the host country, increase in economic growth and development particularly if the policies used by the government are favorable. Let’s look at those effects in detail.
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- Capital buildup
Cross border merger and acquisitions contribute in capital accumulation on a long term basis. In order to expand their businesses it not only undertakes investment in plants, buildings and equipment’s but also in the intangible assets such as the technical know-how, skills rather than just the physical part of the capital.
- Employment creation
Sometimes it is seen that the M&A’s that are undertaken to drive restructuring may lead to downsizing but would lead to employment gains in the long term. The downsizing is sometimes essential for the continued existence of operations. When in the long run the businesses expand and becomes a successful it would create new employment opportunities.
- Technology handover
When companies across countries come together it sustains positive effects of transfer of technology, sharing of best management skills and practices and investment in intangible assets of the host country. This in turn leads to innovations and has an influence on the operations of the company.
This Merger between Daimler and Chrysler created a large automobile corporation which ranked third worldwide in terms of revenue and market capitalization and fifth in terms of the number of units they sold. The new corporation had 442,000 employees and a market capitalization approaching $100 billion all set to take advantage of synergy in in retail sales and distribution, purchasing, product design, and research and development. They were confident that the new corporation formed would exploit the huge growth opportunities in terms of the geographical coverage and product segments.
Cross Border Merger and Acquisitions- Issues and Challenges
Looking at the underlying dynamics cross border merger and acquisitions are quite similar to that of domestic M&A’s. But because the former are huge and international in nature they pose certain unique challenges in terms of different economic, legal and cultural structures. There could be huge differences in terms of customer’s tastes and preferences, business practices, the culture which could pose as a huge threat for companies to fulfill their strategic objectives. In this section let’s discuss these issues and challenges briefly.
- Political concerns
Political scenario could play a key role in cross border merger and acquisitions, particularly for industries which are politically sensitive such as defense, security etc.
Not only considering these aspects it is also important to concerns of the parties like the governmental agencies (federal, state and local), employees, suppliers and all other interested should be addressed subsequent to the plan of the merger is known to public. In fact in certain cases there could be a requirement of prior notice and discussion with the labor unions and other concerned parties. It is important to identify and evaluate present or probable political consequences to avoid any probability of political risk arising.
- Cultural challenges
This could pose a huge threat to the success of cross border merger and acquisitions. History has seen huge mergers that have failed because of the cultural issues they have had. When there are cross border transactions there are issues that arise because of the geographic scope of the deal. Various factors such as differing cultural backgrounds, language necessities and dissimilar business practices have led to failed mergers in spite of being in the age where we can instantly communicate. Research proposes that intercultural disagreement is one of the major pointer of failure in cross-border merger and acquisition. Hence irrespective of what the objective behind the alliance is businesses should be well aware of the of the intercultural endangerment and prospects that come hand in hand with the amalgamation process and prepare their workforce to manage these issues.
In order to deal with these challenges businesses need to invest good amount of time and effort to be well aware of the local culture to gel with the employees and other concerned parties. It is better to over communicate and conforming things tirelessly would be the key.
- Legal considerations
Companies wanting to merge cannot overlook the challenge of meeting the various legal and regulatory issues that they are likely to face. Various laws in relation to security, corporate and competition law are bound to diverge from each other. Hence before considering the deal it is important to review the employment regulations, antitrust statute and other contractual requirements to be dealt with. These laws are very much part of both while the deal is under process and also after the deal has been closed.
While undergoing the process of reviewing these concerns it could indicate that the potential merger or acquisition would be totally incompatible and hence it is recommended to not go ahead with the deal.
- Tax and accounting considerations
Tax matters are critical particularly when it comes to structuring the transactions. The proportion of debt and equity in the transaction involved would influence the outlay of tax; hence a clear understanding of the same becomes significant. Another factor to decide whether to structure an asset or a stock purchase is the issue of transfer taxes. It is very important to alleviate the tax risks. Countries also follow different accounting policies though the adoption of IFRS has reduced this to an extent; many countries have yet to implement it. If the parties in the merger are well aware about the financial and accounting terms in the deal, it would aid in minimizing the confusion.
- Due diligence
Due diligence forms a very important part of the M&A process. Apart from the legal, political and regulatory issues we discussed above there are also infrastructure, currency and other local risks which need thorough appraisal. Due diligence can affect the terms and conditions under which the M&A transaction would take place, influence the deal structure, affect the price of the deal. It helps in revealing the danger area and gives a detailed view of the proposed transactions.
There are countless other issues as every deal has its own flavor and differences. But it is of course very important to identify and tackle those challenges to help close a deal.
Despite the Daimler-Chrysler merger showed a rosy picture it failed. Yes it is one of the most well-known of all international mergers then ended in fiasco. Let’s see what went wrong and which were the issues that caused its failure. Analysts have agreed on the fact that the cultural mismatch was one the main reasons for the downturn. Looking at the organization structure Daimler was a very well tiered organization with a clear chain of command and respect for authority. Chrysler, on the other cultural hand, favored a more team-oriented and unrestricted approach. There was lack of harmonization, opposing working styles and cultural values between American and German managers. Apart from this there was severe lack of trust among the employees. All these issues and the attempt of Daimler-Benz to run Chrysler USA operations in the same way its German operations, lead to its failure.
Trends in Cross border Merger and Acquisitions
In spite of the issue we have discussed above the number of cross border transactions have increased quite radically over the past few decades. Though there have been a few economic crisis and the situation has not been so conducive, it had not disturbed the upward trend in cross border M&A activity.
More and more companies want to go global as they offer great opportunities which are comparatively cheaper option for companies to build itself internally. Looking at the M&A sentiments around the world it shows that the businesses acquisition emphasis is changing from domestic to cross border transactions because of the various benefits it offers.
According to the International Business Report (IBR) two out of five businesses that are preparing to grow through acquisitions over the next three years are contemplating cross border opportunities. Last year this equation was one in three and before the financial crisis it was one in four. It’s no surprise with the things pacifying in the euro zone to see almost 44% of Europe and 38% of North America who seek business opportunities abroad.
Talking about the BRIC countries who are also looking at cross border merger and acquisitions in order to gain entry to new markets. In this China is leading the way and are getting involved in M&A transactions in a big way and are ardent to show themselves as a striking option for investors globally.
The other markets in Asia and following suite and are up for lucrative M&A activity in various emerging markets in order to grow.
Source: Thomson Reuters
Despite the fact that domestic acquisitions have been the prime focus for inorganic growth in companies which is almost 84%, the yearning for cross border merger and acquisitions is becoming extremely protruding.
Summing It Up
On a whole cross border merger and acquisitions can provide great benefits to companies and also increase its share price but as we saw there are a lot of factors which need to be taken into consideration to avoid any glitches. It is extremely vital for the business structures of both the countries involved in M&A transactions and learn from cases like that of Daimler-Chrysler. Most critical factors which separate the successful M&A transactions from the others, who fail, are thorough and planned preparation and commitment of time and other resources. Considering all this the prominence and importance of cross border transactions clearly illustrates the business mindsets to access the global markets and grow.
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