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Emerging Trends in Cross Border Mergers

INTRODUCTION:

In the past decade, the world had seen several improvements in the modes of which information is spread. Although what aided in such growth? The removal of old norms and communication to the outside world has provided with information of what exists outside the national borders. With such information and technology in use, a company may desire to merge with or acquire other private entities across the world. These decisions lead to cross border mergers and acquisitions.  The question as to why such mergers and acquisitions take place can be answered in two parts. One is to merge the functions of the companies that are involved as there can be certain components that are projected as compatible. Examples include company culture and the connection that can be made with their objectives to grab the attention of common customers for the respective business ventured. The other is to reduce the financial liability of a company and merging them could reduce the risk of going out of business. Over the past decade the world has seen a surge in the number of cross border merger and acquisition deals. Initially there had not been a large amount of deals that were completed but as years went by, there has been a significant increase in the number of deals compared to the statistics shown at the start of the decade. This essay delves into how and why such surge has occurred.

THE RISE IN NUMBERS:

According to the institute of mergers, acquisitions and alliances (IMAA), the year of 1985 had only seen 472 cross border M/A deals across the globe and fast forward to the year of 2018, there is a surge in the amount of completed M/A deals which is calculated up to 13,606 deals[1]. There are varying answers as to why these deals had increased but the stats do show that the worldwide conditions are perfect for such deals and that is why there has been a surge in numbers across the globe.

Source: IMMA analysis, imaa-institute.org

The graph shows the number of transactions involved in Mergers and acquisitions that are done over the past 34 years and to compare the numbers from the start of the decade to the end, there is an increase in the value and the number of such transactions. Early 2000s had seen around 40000 transactions every year and by the end of the decade, around 50000 transactions are done every year. The value for the year 2020 shall not be taken due to the Covid Crisis and had slowed down the numbers. Due to the lack of revenue and business for multiple companies across the world, there will be a lack of deals that are done till the crisis has been solved and the companies has financially recovered.

LIBERALISATION LEADING TO DEREGULATION ACROSS THE GLOBE:

Countries across the world had decided to liberalise their policies which allows companies set shop in countries which previously had rules which had halted these companies to enter the market via deregulating policies. There had been a period of liberalisation leading to deregulation of various markets in multiple countries which had brought a shift from regulation which is well thought out and reasonable from regulation that had existed due to old rules and norms. Financial markets were particularly affected by the constraints on international capital flows, designed to help maintain currency stability, which existed in many industrialised economies until well into the 1980s. The regulatory reforms had generated significant structural changes and the removal of excess capacity; in conjunction with the new trading opportunities made possible by technological improvements they have acted to spur the rapid consolidation of financial institutions by changing the optimal scale of production, and expanding the supply of international financial service[2]

In 1991, India had decided to bring in economic liberalising policies in order for the growth of the GDP and opening up the market for foreign investors. The country experienced a rapid growth in outward FDIs, particularly between 2000 and 2007. Encouraged by the financial reforms unleashed by the Indian Government, an increase in large-scale mergers and acquisitions (M&A) by Indian companies occurred. This was primarily because the shackles that prevented Indian firms from acquiring firms abroad were removed. The socialist dogma of quixotic self-reliance was cast aside, and Indian firms were given the freedom to grow and fulfil their international aspirations.[3] Earlier in India, cross border mergers can only be sealed if it is in accordance to Section 234 of the Companies Act, 201 and Rule 25A of the Companies Rules, 2016. This involves approval from the RBI in the early stages, payment of consideration and all other factors must be done which is acceptable by the Companies act 2013 and Companies rules 2016. Although the RBI had established FEMA (Foreign Exchange Management Regulations) on March 20 2018 where these regulations must be read with the provisions given above and they lay down a more detailed framework regarding such cross border mergers and amalgamations and there is no need for prior RBI approval. However, the deals must be in accordance to the FEMA regulations and the Companies Act 2013 for the successful completion of these cross border mergers.

This has led to freedom of companies entering into the market without any hassle or delay such as getting approvals from the RBI and has opened up an avenue where companies can merge with the targeted companies with ease provided it is done legally and in accordance to the respective legal provisions. Once such deregulation takes place, companies across the world would be attracted to set up shop in the respective countries taking multiple factors such as political scenario and the needs and wants of the customers residing in the country at that particular time into consideration.

GLOBALISATION EXPANDING MARKETS:

Globalisation leads companies introducing themselves into markets across national borders that have not been entered into and expanding their businesses in an international scale and introducing foreign participants and customers. These deals are not a recent trend but was well established back in the 90s. With numbers given by World Investment Report for the year 1 999 (UNCTAD) cross-border mergers and acquisitions (M&A) deals had seen a gradual increase in the past decade. At the beginning of the decade of 90s or in the year 1991 cross-border mergers and acquisitions which took place in the world had involved amounted to US $ 85 billion and this meagre figure has touched a record level figure of US $ 544 billion i.e. an increase of 6.4 times or 540 percent in a short span of 8 years.[4]  

Companies enter into foreign markets due the opportunities provided and with the surge in improvement in technology which could aid them which leads to straight increase in foreign direct investment. While entering the industry, competition increases which could aid them in finding out about the needs and wants of the customers in efficient way. Although with its multiple benefits that come while expanding businesses and markets, there are certain challenges faced while dealing with cross border companies. The reasons could be the lack of synergy between the companies and company cultures that are not compatible with each other. The buyer company must gather all important information pertaining to their financial records and contract information. The process must be transparent to avoid legal problems which could affect the deal involved. The company must select a location where the political scenario of the targeted place is tensionless which could lead to smooth completion of deals. With taking such factors into consideration, multiple companies over the past decade have decided to expand and diversify by entering markets and industries which seem to be profitable for the companies.

CONCLUSION:

We live in the age of information and technology where connection towards places outside the national border have increased and will keep increasing. With the increased connection, companies would have the desire to go beyond the country where they reside. Any company or private entity which is performing well in the market would have the desire to expand their business and reach out into multiple countries and if a company is performing to the level desired, they can merge with another company which could aid them in their financial situation. For example, one of the largest acquisition deals of 2019, AbbVie and Allergan where AbbVie had purchased Allergan for 63 billion dollars due to their desire to expand their product portfolio away from Humira and due to the lesser risk involved as Allergan had been cheap due to their financial declination. These deals could not have been done efficiently if this had happened about 20 years ago. However, due to the increase in deregulating policies and the information technology there is a pathway which leads to entities entering markets that have not been entered into and there will only be an increase in numbers involving cross border merger and acquisition deals in the coming years. Coupled with the surge in globalising policies put forth across the globe, liberalisation had expanded the market due to the allowance of such business activities and policies which had attracted companies to set up shop in several locations leading growth in the respective capital markets.


[1] Chart – Cross-border M&A – Institute for Mergers, Acquisitions and Alliances (IMAA), Institute for Mergers, Acquisitions and Alliances (IMAA) (2020), https://imaa-institute.org/highcharts/chart-cross-border-ma/.

[2] Financial liberalization, alliance capitalism and the changing structure of financial markets, IDEAS (2020), https://ideas.repec.org/h/elg/eechap/2550_5.html.

[3] Geeta Rani Duppati & Narendar V. Rao, Cross-border mergers and acquisitions: Mature markets vs. emerging markets with special reference to the USA and India, 2 Cogent Business & Management (2015), https://www.tandfonline.com/doi/full/10.1080/23311975.2015.1088817.

[4] Badar Alam Iqbal, Global Mergers and Acquisitions: Emerging Trends, 57 India Quarterly: A Journal of International Affairs 23-36 (2001),

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Author

Vaishnav Arun Kumar
Student - O. P. Jindal University