Cross-border mergers and acquisitions (hereinafter M&As) have expanded dramatically in recent years. The globalization of industry and changing the worldwide industrial structure. In the 1990s, foreign direct investment tended to gravitate toward mergers and acquisitions rather than Greenfield projects. Between 1991 and 1998, the value of cross-border M&A increased by more than six-fold, with a growing trend toward very large-scale mergers.
The causes that are driving the trend toward cross-border M&As are complicated and vary by industry. Long-term economic expansion in countries like the United States boosts capital available for overseas industrial purchases and draws additional inward investment, while financial market globalization also plays a role. International rivalry and market challenges owing to excess capacity and diminishing demand are forcing restructuring in several established industrial sectors.
What are the effects of cross-border M&A?
M&As are not a new phenomenon, though the motivations and characteristics of these transactions may change over time. Throughout this century, they have tended to come in waves, with periodic spikes in M&A activity when stock market prices were high (Mueller, 1989). Cross-border mergers are heavily influenced by industry features such as development prospects, market structure, and rivalry.
Furthermore, government initiatives such as liberalization, privatization, and regulatory reform promote cross-border unions by boosting the availability of favorable M&A targets and opening up chances. The reasons that drive cross-border M&As can be divided into the macroeconomic, industry, and firm-level factors, as well as technology and government-related issues.
Economic growth has an impact on both the supply and demand for cross-border mergers and acquisitions. Economic growth in home countries raises profits and share prices, increasing the pool of capital accessible for international investment.
Despite the fact that cross-border mergers and acquisitions are common in practically all businesses, recent large-scale unions have tended to be focused on a few key areas, such as petroleum, autos, finance, and telecommunications.
According to trade and industry location theories, in order to successfully conduct foreign direct investment, a firm must have a firm-specific competitive advantage (ownership advantage) in foreign markets (Dunning, 1977). Intangible assets, such as production expertise and skills, marketing capabilities and brand names, or superior management capabilities, are commonly used to gain a competitive advantage.
Diverse sorts of technological progress have had different implications on cross-border M&As. On the one hand, lower communication and transportation costs have encouraged companies to expand internationally in order to capitalize on and consolidate their competitive advantages.
The rapid growth and expansion of foreign direct investment, notably cross-border mergers and acquisitions, has been aided by the liberalization of international capital movements and investments, as well as new investment incentives.
Performance Effects of Cross-Border M&As:
The overall consequence of cross-border M&A transactions is a global re-organization of industrial assets and production structures. This can result in increased overall efficiency without necessarily increasing production capacity. Cross-border M&As make it easier to transport money, technology, goods, and services across borders, as well as to integrate affiliates into global networks.
M&As help in the long run. Additional foreign owners may make new investments in plants and equipment as they expand their operations in host countries. M&As can help with capital accumulation in a broader sense, such as intangible capital like sophisticated technology and management skills, rather than just physical capital.
Similarly, M&As for the purpose of restructuring often result in layoffs but may result in longer-term employment gains. M&A agreements can occasionally succeed by reducing capacity, which may result in the loss of product lines and employment, but is sometimes necessary for the operation’s survival.
M&A can generate positive spillovers by facilitating the transfer of new technology, advanced managerial skills, and other intangible assets to the host country. Through knowledge transfer and dissemination, foreign direct investment can have a positive impact on industrial inventive capability in general.
M&As investments can boost efficiency in the host country by transferring technology, restructuring industries, and increasing competition. According to one analysis of foreign takeovers of British enterprises, foreign acquisitions increased productivity (output per employee) and real wages, owing to the new foreign owners’ larger investment per employee.
Finally, an international organization must have a team that is knowledgeable in this field. The cultural divide must be overcome by corporate owners, and it must not be the cause of M&A failure. Culture may be used effectively to foster strong relationships, which will help the newly formed company succeed. Because culture is both powerful and implicit, it must be a focus for cross-border M&A.
Conclusion & Recommendations
For foreign MNCs, cross-border M&A is one of the easiest ways to enter new markets. However, over the years it has become clear that it isn’t as straightforward as most would think. Many expensive high-end M&A deals have gone down in the past that looked promising initially, such as the HDFC and Max Life Merger, the IDFC and Shriram Finance Merger, and so on. It’s important to consider a few factors to ensure successful cross-border M&As.
- Ensure the general feasibility of the proposed Merger.
- Ensure there is clear communication between the companies about their roles, how these would be executed, and so on.
- Ensure the ability to repay debt capital over a fixed period.
- Ensure approvable of potential M&As, i.e. making sure that the deal is up to par with all regulations, compliances, and so on.
- Ensure that the deal is not anti-competitive in nature.
- Ensure that shareholder expectations are met.