BLACK&WHITE Aspect Of Cross Border Mergers
Abstract – Merger – The new era of economic development .
2 ways merger –Domestic or Foreign . Cross border merger is one way solution to gaining access to foreign market and creating an image to compete with big corporate.Cross border merger is just not merging the business activities but merging in all ways like crossing of different cultures ,different attitudes ,habits ,likes and preferences and many more ,Or in other words in language of biology it is a kind of hybrid of domestic and foreign corporates . Well it sounds well to have gone for a merger of such kind ,but the essence is how to maintain that hybrid so that in long run both the entities donot have to face problem . The main point of my writing this article is why most mergers fail even if merged with a friendly attitude .
Introduction :
In the present context ,economic development is the main slogan of every citizen . This can be achieved 3 ways
1.Exports
2.Expatriation- Transferring businesses, technology, administration and personnel abroad, in branches, overseas plants, subsidiaries etc.
3.Transnational Alliances, mergers and collaboration
According to the language of moths, we know 1+1 =2 ,but this is not always true .And it is proved to be false by merger or acquisition . where 1+1 =3 proves to be more fruitful .
Now the question is- Is merger and acquisition means the same ?
Dictionary meaning may sound same,but in financial terms both are slightly different .
Merger- merging of 2 companies literarily of same size to form a separate company with different ownership and operations or in other words merger is a merger of equals .
Where as acquisition – when one company acquire another to form a company where the existence of the smaller and week company ceases .Or acquisition is a hostile merger .
But in reality merger of equals is not possible and the acquisition taken place between 2 companies are declared to be merger since acquisition gives a negative impact .So in simple terms mergers is a friendly purchase and acquisition is a hostile one.
Detailed Analysis :
Now why Merger is a hot topic?
Because synergy is the magic word which works here for enhancing cost efficiencies of the new company which results from merger .
Staff reduction – The ist effect of merger is reducing the cost to company .
Economis of scale – Size matters every where .Purchasing power get enhanced while placing any order .
Acquiring a newer technology – The newer company gains competitive advantage with more access to new technology.
Market reach improves – Merger result in increased market size .Or the marketing and Distribution channel get improved more and more .The new company gets better access to investment market due to increased market size.
Tax write off – A profitable company merges with a loss making by using losses as a tax –write off to offset the profits .
But we all know when there is white there is obviously somewhere black . Since white contains black also .So merger always gives positive affect is also not true ,sometimes a merger may not prove to be fruitful .
Now merger can take different forms viz horizontal merger,vertical merger ,conglomerate merger depending upon business structure .There is another merger which is now in the hit list –cross border merger ( Merge of 2 companies of different nationality )Ideal example Merging of Tata with Corus .
This 3 mantra – Privatisation, liberalization and globalization is the main menu of every foreign delegate talk .Cross border merger is just the masala to make that menu tasty .
Why cross border merger?
To get access to global markets and global resources –technology and skilled people .According to united nations there were 1660 cross border merger worth US$5.285 trillion and the number is increasing .
Certain significant cross border mergers are Dailmler-Chrysler,BMW- Rover ,Ford –Jaguar –Volvo-Mazda,Renault –Nissan,SKB-Glaxo-Beacham-Smithkline-Beckman,Vodafone –Airtel,CIBA-Sandoz,Unilever-Best foods-Ben& Jerry’sand many more .
Now what are the black & white aspect of cross border merger
Coming to the black side :
Generally different obstacles comes in the way of cross border mergers .
1. At the time of executing the merger –
a.Legal disparities between the merging entity even though the merge is a friendly one.
b. Complex legal set up especially in the financial sectors of any of the merged entity ,thereby causing obstacle in decision making process .
c.Defence mechanism done in some member countries to prevent hostile takeover ,also act as an obstacle to some mergers.
d.Differences in accounting system may cause hurdle in determining financial status of a company.
e.Different tax assessing system is also one of the barrier to cross border merger .Also the VAT applicable to different financial services or products may put at risk the synergy to be obtained .
f. Misuse of supervisory powers by the shareholder of the merged entity may put the business model at risk
g .Economic barriers may come at the time of execution of merger process .
h. Political interference ,employee unacceptance to the merger process ,shareholder’s reluctance and many more may pose a threat to the whole process.
2. Different extra cost incurred due to cross mergers which should not have been present in case of domestic mergers.
One off cost (cost for execution of merger )and Ongoing cost (cost incurred for the management of the merged entities ).
- Law prevailing in some countries may put restriction on the type of offer to be made (cash vs exchange of shares) which again may obstacle the execution process .
- Consumer protection rules ,differences in employee legislation ,different accounting system ,data protection directive employed in different countries are all one kinds of obstruction to cross border merger and cause extra cost .
- Exit tax on capital gain due to transfer of the establishment increases cost . Also impact of taxation on dividends may give negative impact on shareholders
- Exchange of share mechanism prove to be more expensive in case the 2 merged entity are listed in different exchanges .
- Different product mix due to different habits & buying preferences of customers and cultural difference may cause the process to be a costly affair .
- Differences in economic cycle ,political concession and disbelief of customer on foreign entity all contribute to the increase in cost .
The last and common drawback is that the pure public sector company suffers a stiff competition from the foreign majors operating in India by merger ,thereby posing a threat to their existence .
In this way many obstacle comes in the way ,and this obstacles also changes sector wise .But still cross border merger will not loss its importance because of its advantageous aspects .
Discussing on the whiter aspect of cross border merger .
Cultural integration – Cross border mergers results in cultural differences as well as cultural integration .Differences because of different communities and to remove this,integration is applied by merged entity .
Cultural integration eliminates conflicts arising from cultural differences by organizing and amalgamating the values, psychological states, and behavior modes of different communities.
Technological and R&D development – Cross border merger help the merged entity to improve its technology and R& D thereby helping the firm to get competitive advantage.
Global access – This kind of merger help the firm to get access to global market , thereby companies product and services are no more restricted to domestic circle .They are now globally accepted .
Increase in FDI – We all know foreign reserves of India is increasing day by day and this is the result of liberalised government regulation to make cross border merger more viable.
Easier access to global capital market –Cross merger helps the merged to get listed in international stock exchanges ,thereby raising funds from international market becomes an easy process .
Economic development – If the merger takes place between 2 firms one from developing and another from developed country ,then economic development of weaker country can take a faster pace .
Increase in Competition –Merger is a threat to domestic companies,but in other way it also enables them to improve their competitive edge in order to survive .Ex LIC –domestic company strives to improve its service more and more to fight back the other insurance merged companies –( Private and foreign ).
Improvement of employment skill – Darwins Theory –highlights “Survival of the fittest” .Cross border merger results in more and more competition and thereby improving skill of the employees thereby making the above theory true .
So cross border merger sounds well considering the advantageous aspect ,but it is to be kept in mind that maximum merger fails because of various reasons that come in the way though the merger may have positive impact on both the parties.
Before going in for the process of executing merger ,certain
important strategies are to be followed to make the process a successful story .
The ist step toward success is acquisition integration ,which is rarely done by any of the merged entity because of less time ,insufficient information and lack of awareness .That is a proper planning for integration before deal is done, need to be given importance .
How the steps goes further
a. Prepare a check list for different integration issues which are to be handled with and divide among personel to deal with it as fast as possible and to find out the ultimate value obtained from the deal .
b. Ensuring the employees to learn differences in accounting standards, labor laws, environmental regulations,and norms and regulations governing how business is conducted in the country of the acquired firm early in the process.
c. Proper communication to the employees should be there ,so that the uncertainities they may face during the deal can be handled with easily.
Summarising the steps once again
1.Due diligence is required in
a.reducing odds of failure .
b.Clarification of strategies and motivations.
c.Main points taken into consideration –Legal matters , Rights assigned and HR related matters .
d.Odd Laws and customes prevailing .
2.Total value added or additional value paid to the seller only after the acquired business meets the performance measure as expected after closing of the deal .
a.Milestone measured regarding the financial performance for a period of year (net revenue,net income ,cash flows etc ).
b.Any disputes involved or not .
c. No fiduciary duty provision .
3.Proper understanding of seller employees and own employees attitude .
4. Representations and warranties of the acquired company.
a.Data given are true and right viz financial statements .
b. No debt so far.
c.No undisclosed liabilities .
d. No litigation or cases pending against the merging entitity.
e.Reliable accounting system.
f.Understanding tax implications.
g.No unpaid tax or audit pending.
h, Full disclosure relating to employment and labour.
insurance policies,lease books and records,press release
and many more .
5. After fulfilling conditions dealing is now at the stage of close .
So the saga behind Merger is creating value ,acquiring competitive advantage along with synergy realization thru cost cuts .But it could not be acheived after thorough learning of acquisition integration process.
Inspite of a thorough learning process most of the mergers fails.
May be the following can be one of the prime reason for failure . 1. Flawed Corporate strategies for either or both of the merged entity .
2.One of the company sugarcoats the truth and the other buys a powerpoint pitch .
3.Cultural misfit ,loss of key employees after the process.
4.Assumption taken for synergy calculation may come to be false .
5.Corporate governance is plain ,simple or ineffective by nature .
6. Decision to buy or sell may give a negative impact to the board of directors .
7.Either of the companies management team may be inexperienced in the dealing of M&A.
8. Cultural differences- because the differences in culture (management style, decision-making, expression etc) and language make it difficult to even have a common framework within which to work and work out the corporate culture differences.
And many more-------
Inspite of so many drawbacks there are many success stories coming up .
Important statistics regarding some of the big deals made nationally and worldwide .
Largest M&A deals worldwide since 2000
|
Rank
|
Year
|
Acquirer
|
Target
|
Transaction Value
(in Mil. USD) |
%
|
|
1
|
2000
|
Merger : America Online Inc. (AOL)
|
Time Warner
|
164,747
|
21.83
|
|
2
|
2000
|
Glaxo Wellcome Plc.
|
SmithKline Beecham Plc.
|
75,961
|
10.06
|
|
3
|
2004
|
Royal Dutch Petroleum Co.
|
Shell Transport & Trading Co
|
74,559
|
9.87
|
|
4
|
2006
|
AT&T Inc.
|
BellSouth Corporation
|
72,671
|
9.62
|
|
5
|
2001
|
Comcast Corporation
|
AT&T Broadband & Internet Svcs
|
72,041
|
9.54
|
|
6
|
2004
|
Sanofi-Synthelabo SA
|
Aventis SA
|
60,243
|
7.98
|
|
7
|
2000
|
Spin-off : Nortel Networks Corporation
|
|
59,974
|
7.95
|
|
8
|
2002
|
Pfizer Inc.
|
Pharmacia Corporation
|
59,515
|
7.89
|
|
9
|
2004
|
Merger : JP Morgan Chase & Co.
|
Bank One Corporation
|
58,761
|
7.79
|
|
10
|
2006
|
Pending: E.on AG
|
Endesa SA
|
56,266
|
7.45
|
|
|
|
Total
|
|
754,738
|
100
|
The top 10 acquisitions made by Indian companies worldwide:
|
Acquirer
|
Target Company
|
Country targeted
|
Deal value ($ ml)
|
Industry
|
|
Tata Steel
|
Corus Group plc
|
UK
|
12,000
|
Steel
|
|
Hindalco
|
Novelis
|
Canada
|
5,982
|
Steel
|
|
Videocon
|
Daewoo Electronics Corp.
|
Korea
|
729
|
Electronics
|
|
Dr. Reddy's Labs
|
Betapharm
|
Germany
|
597
|
Pharmaceutical
|
|
Suzlon Energy
|
Hansen Group
|
Belgium
|
565
|
Energy
|
|
HPCL
|
Kenya Petroleum Refinery Ltd.
|
Kenya
|
500
|
Oil and Gas
|
|
Ranbaxy Labs
|
Terapia SA
|
Romania
|
324
|
Pharmaceutical
|
|
Tata Steel
|
Natsteel
|
Singapore
|
293
|
Steel
|
|
Videocon
|
Thomson SA
|
France
|
290
|
Electronics
|
|
VSNL
|
Teleglobe
|
Canada
|
239
|
Telecom
|
But in India still no of purchase made is less than no of sell made .Cross border sales deals during 2000 were 1219 US $ million while purchase deal were 910 US $ million.But during 2005, these have been increased to 4210 US $ million and 2649 US $ million. While overall sales are 10,873 US $ million and purchase deals were 8249 US $ million during last five years.So India have to fight for more and more in order to make no purchases made more than sale .
Conclusion:
So to conclude that cross border merger is one step to economic development ,and to make the story a success lot of strategies are to be implemented from either of the merged entity and also need to be correctly executed .
Author –Chandrima Das (Junior Faculty-finance),INC Nagpur
CAclubindia
