Cross Border Merger and Acquisition

Mergers and Acquisitions are explained as companies’ consolidation. The terms mergers and
acquisition are defined below:

Merger
A merger combines two companies in one. Such transactions take place between two
businesses/ companies of the same size. Additionally, the terms of the merger are amicable
and also mutually agreed by the two companies to become equal partners in the new venture.

Acquisition
Acquisition occurs when a company buys another company. Sometimes, the purchase is
friendly whereas sometimes it is hostile. Thus, a large company acquires a small company to
diversify its business.

Cross Border Merger and Acquisition

A cross border merger explained in simplistic terms is a merger of two companies which are
located in different countries resulting in a third company. A cross border merger could
involve an Indian company merging with a foreign company or vice versa.A company in one
country can be acquired by an entity (another company) from other countries. The local
company can be private, public, or state-owned company. In the event of the merger or
acquisition by foreign investors referred to as cross-border merger and acquisitions.

Cross border merger will result in the transfer of control and authority in operating the merged or
acquired company. Assets and liabilities of the two companies from two different countries are
combined into a new legal entity in terms of the merger, While in terms of Cross border acquisition,
there is a transformation process of assets and liabilities of local company to foreign company
(foreign investor), and automatically, the local company will be affiliated.

According to section 234 of the Companies Act, 2013 read with Rule 25A of Companies
(Compromises, Arrangements and Amalgamations) Amendment Rules, 2017– defines it
as a merger and amalgamation between companies’ registered under the Companies Act,
2013 or under the previous Act i.e. Companies Act, 1956 and also the company incorporated
outside India in the notified foreign jurisdictions or vice versa.

Concept of Cross Border Merger and Acquisition

A local company can be acquired by another company located in other countries. The
company can be a private company, public company or a state-owned company. The merger
and acquisition by foreign investors also referred to as cross border merger and acquisition,
results in the transfer of authority and control in operating the merged or acquired company.
Assets and liabilities of two companies incorporated in two different countries are combined
as a new legal entity in terms of the merger. While a transformation process of assets and
liabilities of the local company to a foreign company and automatically, the local company
will be affiliated in the acquisition process.
As per legal terminology: The country where the company to be acquired or where
the target company  is situated is referred to as Host country.

TYPES OF CROSS BORDER MERGERS

The most popular types of mergers are horizontal, vertical, market extension or
marketing/technology related concentric, product extension, conglomerate, congeneric and
reverse. Recently, the concept of inbound and outbound mergers was also introduced in the
Companies Act, 2013 as part of Section 234 of the Act.
Inbound M&A’s
In this process foreign company mergers with or acquires an Indian company.
E.g. Daichii Acquiring Ranbaxy
Outbound M&A’s
In this process an Indian company merger with or acquires a foreign company.
E.g. Tata steel Acquires Corus      

Factors to be considered in Cross Border Mergers and Acquisitions:

Factors that need to be considered when initiating and implementing cross border mergers
and acquisitions. These include 1) proper management, 2) cultural integration,
3) business policies, 4) taxation, and 5) general business conditions in the country.

1. PROPER MANAGEMENT

As Mark Jamrozinski states, cross border mergers and acquisitions ought not to be scary. If
you get scared with cross border mergers and acquisitions you will end up messing
everything up and due to the panic that will come up, the involved transactions will fail to
live up to the aspirations held. The scary bit regarding to mergers and acquisitions ought to be
eliminated with the initiation of proper management strategies. Just like any business
transaction, cross border mergers and acquisitions demand that they be undertaken with
proper techniques of management in all the aspects of the involved business. Some of the
critical management areas that demand keenness in their handling include market analysis,
human resource aspects and product integration and development.

In market analysis, it is obvious that in either side of the border where such cross border
mergers and acquisitions are to take place; there exist unique markets, with mostly unique
demands and structures. Therefore, it is a critical demand that the management techniques to
be initiated provide a guideline detailing how to conduct an extensive market analysis before
the cross border merger and acquisition exercise comes to effect. It is a demand that this
market analysis takes a comparative approach in the sense that both of the involved
businesses have their markets fully analyzed then comparisons drawn with an aim of
explaining their demands and structures. It is only after the market analysis has extensively
been done that proper management can be attained.

Proper management must involve the aspects of human resource. In fact, cross border
mergers and acquisitions will on a very large scale rely on human resources if sustainable
success is to be attained. Human resource aspects directly give a notion of employees who
work for the involved firms. There is always the issue of job security that comes up when
cross border mergers and acquisitions come up. Often, employees develop the notion that
they may have their participation in the businesses that are merging terminated due to a
number of reasons, however realistic or unrealistic they maybe. Such employee notions hurt
employee productivity and the failure gets directly related to human resource management.
Therefore, when initiating cross border mergers and acquisitions, it is a demand that the
proper management factors gets to understand the plight of human resource aspects in such
transactions.

Product development and integration is another topic of concern when dealing with the topic
of proper management in cross border mergers and acquisitions. Logically, the involved
business in a cross border merger and acquisition exercise has their unique products that they
deal with. When such businesses will have merged, they will effectively become a single
entity and in such a case, the products will need to be integrated in a way that will reflect that
there actually was a cross border merger and acquisition exercise. Integrating the product and
developing it is one of the most challenging tasks in cross border mergers and acquisitions.
Therefore, it calls for utmost keenness when trying to streamline all the thorny issues that are
often incurred in product development. In the end, it is only through proper management that
effective product development and integration can be realized in cross border mergers and
acquisitions.

2. CULTURAL INTEGRATION
The topic of culture is always a complex one in cross border mergers and acquisitions. In
most cases, as Zhang Rong states, cross border mergers and acquisitions are transactions
involving large sums of money which take in widely varied cultures. The term culture in
cross border transaction elicits different definitions from among the involved players. In most
cases, you will find that players from one side of the border hold a different view of the
business culture while another set of players from the other side of the border have their own
view. Entering into a cross border merger and acquisition exercise without fully integrating
these differing views on business culture will be a mistake of dire consequences that those
involved will have done. In fact, business culture is a wide topic which in most cases will
include the different business and market philosophies held by the two or more merging
businesses in a cross border merger and acquisition transaction. It will be proper only when a
team is set up to strategize on how cultural integration will be conducted.

Some of the topics that the team set up to strategize on cultural integration will have to
handle will include business philosophies and market strategic positioning. Every business
always has its own philosophy from which all its strategies and ambitions stem up from.
Therefore, it may be quite a daunting task in trying to have the cross border businesses to
with draw their philosophies given the fact that almost everything in regard to management
will remain intact regardless of the merger and acquisition exercise. The team set for cultural
integration purposes in cross border mergers and acquisitions will have to ensure that a new
business culture is developed that will be inclusive of all the aspects as previously held by the
cultures of the involved businesses. This will certainly be a tough task but the involved
businesses ought to do everything in their power to ensure that a single but effective business
culture is adopted which will help the newly born business entity attain its ambitions as per to
the terms and conditions of the merger.
3. BUSINESS POLICIES
Every country has its own business policies. These policies often outline how business should
be conducted while in specific areas. The policies determine how successful or unsuccessful
business becomes in the markets of such countries. For instance, in cross border merger and
acquisitions, the involved businesses come from different countries with unique business
policies. For business A which has all along operated in a specific country, it may have
learned to adjust itself in the best way possible in order to meet its own ambitions as per to
the policy guidelines stipulated and set in that country. This scenario also repeats for business
B which has operated in a specific country. When these two businesses will merge and start
operating in any one of the involved countries, it is possible that business ambitions may be
hindered given the fact that one of the businesses will not have effectively adapted to the new
policies in this new country. However, this may not be a persistent problem as sooner or later;
the business will adjust and cope with the policy demands.

In most countries, business policies abhor monopolies. According to Vanessa Zhang, a

monopoly is a situation where a single business entity controls a specific product or
commodity in a specific market. Realistically, such abhorrence is beneficial as it ensures
consumer protection from exploitation by businesses. Cross border mergers and acquisitions
are often viewed as a precedent to monopolies. When a business merges with another, there is
a likelihood that market competition for the provision of such a product to the consumers will
cease to exist. With no competition in the market, the new business enters into a monopoly
which diminishes the consumers’ power to choose from a wide range of businesses before
picking on what business to buy from. This is often viewed as an unfair business practice and
most countries have crafted policies to control cross border mergers and acquisition with an
aim of discouraging monopolies. Therefore, when in the quest of trying to initiate a cross
border merger and acquisition exercise, it is important that such monopoly controlling
policies are fully understood lest the gets illegalized in the country where it is to be
conducted.

4. TAXATION
Taxation is always one of the most challenging issues in the practice of business. The
taxation challenges are magnified in cross border mergers and acquisitions. In most cases the
acquiring firm, being that it operates in a foreign land will have to pay higher taxation rates
than its competitors in business that will be classified as local businesses. The unequal tax
rates between the foreign owned business and the locally owned business in cross border
mergers and acquisitions often work against the ambitions of the acquiring firm. As there
develops an unfair playground in relation to tax remittance to the authorities of the country
where the transaction is to take place, realizing sustainable profitability always becomes
elusive. Therefore, it becomes an important requirement that the taxation aspect of business is
keenly considered before venturing into cross border mergers and acquisitions.

In addition to this, it is important that all the specifications and guidelines on how and when
tax should be remitted to authorities once the cross border merger and acquisition venture has
been initiated should be fully understood. History has it that some businesses have been
penalized, fined or banned from operating in some countries due to their failure to remit taxes
as per to the laid down procedures. Therefore, it is important that all taxation practices as
spelled out in taxation laws and guidelines of various countries are keenly studied before
initiating cross border mergers and acquisitions. This is the best way to ensure that the
acquiring business in a cross border merger and acquisition exercise will fully benefit from
the venture.

5. GENERAL BUSINESS CONDITIONS IN THE COUNTRY

In most cases, business success will be determined by a number of conditions in the countries
where the business has been set up. Conditions such as guaranteed provision of security and
availability of reliable and convenient insurance policies and plans should be fully catered
for. With the large amounts of money involved in cross border mergers and acquisition
exercises, it is a demand that these conditions are availed without any form of delay. Delays
in the provision of such useful pro-business conditions in cross border mergers and
acquisitions may prove disastrous to the acquiring firm. The large amounts of funds that are
pumped into the cross border merger exercise should guarantee of their security at all times
and any aspect of threat to such a business should be fully eliminated.

Conditions of effective business should be streamlined to ensure that there is a guarantee of

returns on investment in cross border merger and acquisition transactions. Unless there are
such safe conditions to practice business, the transaction will fail and the losses that may be
incurred may be beyond contemplation. Realistically, cross border mergers and acquisitions
are expensive ventures that demand the best of conditions on and off the market. In addition
to the internal business strategies, there should be an assurance from the authorities in the
new country that the involved business will be safe and no disruptions will hinder its
maximum performance. This is a necessary commitment given the fact that cross border
mergers and acquisitions often provides economic benefits that such countries require for the
development and growth of their countries. Therefore, before initiating cross border mergers
and acquisitions, the involved business should ensure that the conditions of practicing
business in whatever countries where the merger and acquisition will be performed ought to
be safe and disruption free all through the duration of business practice.

Cross border mergers and acquisitions are complex ventures that require proper planning,
management and ethical conduct before they are initiated. Failure to fully venture into these
three practices will lead to failure and such failure will always result in the loss of large sums
of money. Every step that will be taken when in the quest to attain a successful cross border
merger and acquisition transaction must be identified, analyzed and then a decision on
whether to take it or not be made. A cross border merger and acquisition exercise should
never be a one man show but rather an exercise in which every player and stakeholder fully
takes part in before any decisions are made. It is of great importance that every view and
opinion that may be raised by those charged with the responsibility of ensuring a successful
cross border merger and acquisition exercise is taken with the seriousness that it deserves.

What is the Procedure for Cross Border Merger and Acquisition in India?

The procedure for cross border merger and acquisition in India are as follows:

 An application regarding cross border M & A must be made to the tribunal by either
party as prescribed in Section 230 to Section 232 of the Companies Act, 2013.
 The tribunal, after receiving the application, may call the meeting of members or
creditors or both, to obtain approval of the proposed scheme by the members and
creditors. The tribunal will also look into the objections (if any) raised by the
members and creditors.
  Certain important information relating to the company and its business must be
attached along with the application. Certificate of companies’ auditor regarding the
accounting treatment of the company must be filed before the tribunal to ascertain the
nature of the proposed scheme.
 The notice of the meeting to be conducted must be sent to Central Government of
India, Reserve Bank of India (RBI), Security and Exchange Board of India (SEBI),
Competition Commission of India (CCI), the Registrar of Companies (ROC),
respective stock exchanges and the official liquidator; and if any of them has any
objection they have to raise it within thirty days of receiving the notice.
  The merger will come into force if three-fourth of the creditors in debt value or
members in their share values, votes in favour of the cross border merger and
acquisition.
 The requirement of ‘meeting of creditors’ is not needed if the creditors holding at
least 90% value of total outstanding debt, approves the scheme of cross border M&A
by way of an affidavit.

Rule 25 A of Companies (Compromises, Arrangements and Amalgamations) Amendment

Rules, 2017 also specifies some procedures as follows:

 A foreign company which is incorporated outside India may merge with an Indian
Company only after receiving prior approval from RBI.
 The merging company needs to comply with the provisions specified in section 230 to
section 232 of Companies Act, 2013.
 The valuation must be conducted by the transferee company in their respective
jurisdiction.
 The concerned company must apply to the tribunal as per provisions under section
230 to section 232 of the Act.

What are the Jurisdictions Specified for Cross Border Merger and Acquisition?
Jurisdictions for the purpose of cross border merger and acquisition are specified in clause (a)
of sub-rule (2) of 25A:

 Jurisdiction Where the securities market regulator is a signatory to an International

organization of securities commission Multilateral memorandum of understanding or
MOU or a signatory to the bilateral memorandum of understanding with SEBI.
 Jurisdiction not identified in the public statement of Financial Action Task Force
(FATF).
 Jurisdiction where Central Bank is a member of Bank for International Settlements
(BIS).
 Jurisdiction with strategic Anti-money laundering or combating the financing of
terrorism deficiencies to which counter measures apply.
 Jurisdiction which has not made sufficient progress in addressing the deficiencies or
has not committed to an action plan developed with the financial action task force.

Compliance to be followed by Companies during Cross Border Mergers and

Acquisitions
As per Section 6 of the Competition Act, 2002 requires the merging companies to meet the
threshold limit qualifying under section 5 to give notice to the Competition Commission of
India (CCI) within thirty days of approval of the proposed scheme of merger and acquisition
by the Board of Directors of the companies involved or execution of any agreement pr
document in furtherance of acquisition proceedings.

A waiting period of 210 days from the day of giving notice for the purpose of investigating
section 29 and section 30 must be provided to check the existence of any possibility of its
adverse effect on the competition.

If the Competition Commission of India (CCI) under Section 31 of the Act, is satisfied

regarding the negative affect after the approval of M&A, it shall approve it. Whereas, if it
concludes after thorough analysis that the merger is likely to bring an adverse effect in the
market, it will disapprove the scheme or send it for modification as to make it fit for the
approval.

What are the Effects of Cross Border Merger and Acquisition?

 Cross border merger and acquisitions are a reformation of industrial assets and
production structures on a worldwide basis.
 It empowers global transferring of technology, goods and services and integrates it for
overall networking.
 Cross border M&A’s leads to economies of scale and also scope, which helps in
gaining expertise. It benefits the economy, such as increased productivity of the host
country, an increase in economic growth and development, mainly if the policies used
by the government are favourable.

Benefits of cross border merger and acquisition:

Capital build-up

Cross border M & A supports an increase in the capital on a long term basis. To expand their
businesses, it not only undertakes investment in plants or buildings and equipment’s but also
in the incorporeal assets such as technical skills rather than just the capital.

Employment creation
Mergers and acquisition that are undertaken to drive restructuring may lead to downscaling
but would lead to employment gains in the long term. This downsize sometimes is essential
for the continued existence of operations. In case the businesses expand and become
successful, it would create new employment opportunities.

Technology handover
When businesses across countries join together, it brings transfer of technology, sharing of
best management skills and practices in the host country. This results in innovations and has a
better influence on the operations of the company.

Issues and Challenges on Cross Border Merger and Acquisition

1. Political concerns
The political scenario plays a crucial role in cross border merger and acquisitions.
Basically, for industries which are politically sensitive such as defence, security etc.

2. Cultural Challenges
A cultural challenge can be a considerable threat to cross border M&A. To deal with
this challenge, businesses need to spend the right amount of time to get knowledge of
the local culture and also of the employees.

3. Legal considerations
The merging companies must look into the various legal and regulatory issues that
they are likely to face. While going through the process of reviewing these concerns,
it could indicate that the potential merger or acquisition would be incompatible.
Hence, it is recommended to not go ahead with the deal.

4. Tax and Accounting Considerations

Tax-related matters are critical, particularly when it comes to structuring the
transactions. Many countries are yet to implement International Financial Reporting
Standards (IFRS). The parties in the merger should be aware of the financial and
accounting terms in the deal.

5. Due Diligence
Due diligence affects the terms and conditions under which the M&A transaction
would take place, influence the deal structure affects the price of the deal. There are
various other issues as every agreement has its favour and differences
POST-MERGER PERFORMANCE EVALUATION
Cross border mergers can be truly assessed only by evaluating the post-merger performance
of the merged entities. The following parameters may be used to assess the post-merger
performance:
1. Returns: A comparative analysis of the returns being generated by the entity pre and post-
merger should be carried out. If the merged entity is earning significantly higher returns than
the merger is deemed successful.
2. Cash flow and operational efficiency: If post-merger the cash flow significantly
increases and this increased cash flow is put to use to obtain operational efficiency, this too
shows that the newly created entity is performing well.
3. Stock market reaction: If the stock market reaction to the announcement of merger is
positive then the merger appears to be a positive step.