IBM/U3 Topic 5 Cross Border Merger and Acquisitions
Cross border Mergers and Acquisitions or M&A are deals between foreign companies and domestic firms in the target country. The trend of increasing cross border M&A has accelerated with the globalization of the world economy. Indeed, the 1990s were a “golden decade” for cross border M&A with a nearly 200 percent jump in the volume of such deals in the Asia Pacific region. This region was favored for cross border M&A as most countries in this region were opening up their economies and liberalizing their policies, which provided the much, needed boost to such deals. Of course, it is another matter that in recent years, Latin America and Africa are attracting more cross border M&A. This due to a combination of political gridlock in countries like India that are unable to make up their minds on whether the country needs more foreign investment, the saturation of China, and the rapid emergence of Africa as an investment destination. Further, the fact that Latin America is being favored is mainly due to the rapid growth rates of the economies of the region.
Factors to be considered in Cross Border Mergers and Acquisitions
Having said that, it must be remembered that cross border M&A’s actualize only when there are incentives to do so. In other words, both the foreign company and the domestic partner must gain from the deal as otherwise; eventually the deal would turn sour. Given the fact, that many domestic firms in many emerging markets overstate their capabilities in order to attract M&A, the foreign firms have to do their due diligence when considering an M&A deal with a domestic firm. This is the reason why many foreign firms take the help of management consultancies and investment banks before they venture into an M&A deal. Apart from this, the foreign firms also consider the risk factors associated with cross border M&A that is a combination of political risk, economic risk, social risk, and general risk associated with black swan events. The foreign firms evaluate potential M&A partners and countries by forming a risk matrix composed of all these elements and depending upon whether the score is appropriate or not, they decide on the M&A deal. Third, cross border M&A also needs regulatory approvals as well as political support because in the absence of such facilitating factors, the deals cannot go through.
Some Recent Examples of Cross Border M&A
If we take some recent examples of cross border M&A deals, the Jet-Etihad deal and the Air Asia deal in the aviation sector in India are good examples of how cross border M&A deals need to be evaluated against the points mentioned previously. For instance, there is both support and resistance to the Jet-Etihad deal as well as for the Air Asia deal. This has made other foreign companies weary of entering India. On the other hand, if we consider the cross border M&A deals in the reverse direction i.e. from emerging markets to the developed world, the Chinese oil major SNOPC had to encounter stiff resistance from the US Senate because of security concerns and potential issues with ownership patterns. Of course, the recent Unilever takeover of its subsidiaries around the world is an example of a successful deal. The clear implications of these successes as well as failures is that there must be a process that is structured and standardized in each country and by each firm on how to approach the M&A deal. Otherwise, there are chances of hostility creeping into the process and vitiating the economic atmosphere for all stakeholders. More than this, the due diligence must be carried out before any such deals are considered.
Finally, there has been a huge outcry from civil society in almost all the emerging markets in recent months. This has been mainly due to public anger at crony capitalism and tiny elite cornering all the benefits. Therefore, the most essential condition before cross border M&A is actualized is that there must be regulatory scrutiny about the ownership patterns and the holding structures.