By; Diane Okoko, FCIArb
‘Mergers and acquisitions’ is a general term that refers to the consolidation of companies or assets. These can include a number of different transactions such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. In all cases, two companies are involved. In a merger, the board of directors from the companies involved approve the combination and seek shareholders approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company. In a simple acquisition, the acquiring company obtains the majority in the acquired company, which does not change its name or legal structure.
A merger occurs when two separate entities (usually of comparable size) combine forces to create a new joint organization in which, theoretically, both are equal partners. An acquisition refers to the purchase of one entity by another (usually of a smaller firm, by a larger one). A new company does not emerge from an acquisition; rather, the acquired company or target company is consumed and ceases to exist, with its assets becoming a part of the acquiring company. An international merger/acquisition involves a cross-border transaction with various complex and regulatory rules. Although it does have similar characteristics to domestic mergers, such as corporate spin-offs, privatization, acquisitions and disposition of business entities, assets and divisions.
ADVANTAGES OF CROSS-BORDER MERGERS AND ACQUISITIONS
- Ease of transition into the new market and improved economies of scale support, market know-how and brand name awareness.
- It can help to bring money, technological innovations, products and services into nations.
- It can provide strategic advantages in the markets, facilitating market dominance.
- It provides a main driving force in Foreign Direct Investment (FDI)
- It improves synergy between firms that increase economies of scale or scope.
- Provides access to new markets to transitioning and developing nations.
- Increase in competition among nations in various markets.
- It puts pressure on domestic economic policies, both internally and externally which will drive advancement and growth.
- It improves privatisation income in the host country.
DISADVANTAGES OF CROSS-BORDER MERGERS AND ACQUISITIONS
- It drives out local or domestic enterprises.
- It devalues the domestic stock market.
- It undermines the economic development strategies of a nation.
- It brings about an increase in unemployment.
- It often leads to asset stripping and closing of companies.
FACTORS OF INTERNATIONAL MERGERS AND ACQUISITION
- Economic/Financial factors: An important factor driving mergers and acquisitions is the need for competition control, increased industrial productivity and economic growth. There is also the need to expand by accessing markets across the globe, which have not yet been tapped. There may also be restrictions in the target country, where the target firm may face higher cost of funding, making the acquiring firm more attractive and acquisition more reliable. Also, target countries having less restriction on foreign investments in a bid to invite investors, facilitates international mergers. Increased GDP of a host country has positive effects on foreign investments while higher corporate tax and increase in exchange rates has the opposite effect.
- Institutional/Regulatory factors: The economic and social policies of a country can be tailored towards protecting the local companies or provide investor protection. These policies of a country affect FDI, joint ventures, exportation, licensing and mergers and acquisitions. The better a host country’s laws on financial markets, accounting, taxation and company registration, the higher the chances of international mergers and cross border acquisitions, as opposed to weak institutional laws, economic performance and investor protection.
- Political Environment: Political influence and intervention are key factors in determining whether or not a cross border merger or acquisition will happen. It is well founded that the higher the level of corruption in a country, the more attractive it is, for international investment and cross border acquisition. Opportunities for bribery and escape of laws through loopholes would allow international investors to carry on their operations with little oversight and accountability. Other political issues such as terrorism is also a deciding factor inflow of investment in a country and the likelihood of cross border mergers and acquisitions.
- Geographical factors: It is obvious that physical distances between the home and host countries will be a deciding factor on cross border mergers between firms in the countries. The distance between the two countries correlates with the cost and ease of acquisition.
- Cultural factors: Cultural differences between the host and target countries also play a role in the decision making when it comes to cross border mergers and acquisition. This may involve the languages, religion, food, commodities in demand and those consumed, all of which influence the initial decision of a firm on where to expand their business. The cultural factor is also closely tied with the geographical factor.
ACTORS IN INTERNATIONAL MERGERS/ACQUISITIONS AND ROLES
POST MERGER CHALLENGES
- Merging of Personnel: One of the major challenges faced immediately after a merger, is the merging of the teams from both organizations having different strategies, ideas beliefs and cultures. Being one of the most important aspects of post-merger integration, failure in a successful merge the teams will hinder any progress moving forward, and it is the role of the management to ensure that the organizational culture of both firms will be in sync, even before the merger is initiated.
- Slow Decision Making: Mergers inevitably result in the birth of a larger company or firm, which brings about a common challenge faced by companies, the bigger they grow. The swiftness and ease of decision making process of a firm is relative to its size and so one of the first challenges facing a merger is the experience of slow decision making. Another side effect may be that the smaller firm in the merger being completely overpowered and blocked out due to the bureaucracy involved.
- Inadequate Due Diligence: Both financial and legal due diligence are key stages of the pre-merger process, but it is easy to overlook the fact that one company is selling to the other and as a result may paint try to paint a better picture of themselves in an attempt to reach an agreement. What that means for the firm after the merger is that information which may have been buried in the initial stages of the merger may begin to surface. This issue is at times inevitable but proper documentation of seller representations and warranties in the merger agreements can protect potential parties to a merger.
- Loss of Employees: Linked to the issue of integration of the teams involved, is the fact that after a merger, there may be employees, in some cases, key and influential employees, who may be unhappy with the merger or who may have been against it in the first place. It is common in a merger for the firm to lose those employees in the process, which may lead to realization of lower productivity and financial targets as initially envisioned.
- Inadequate Legal Protection: Inadequate legal protection when it comes to execution of the merger, due to incompetency, inexperience or negligence of the legal representation involved. Improper documentation of merger transaction and protection in the agreement can lead to loss of millions, for the firm after the merger is completed. Careful selection and acquisition of legal representation can avoid this challenge.
- Low Earn-out Pay: Earn-outs, which are payments made to shareholders of the selling company, may well be much lower than initially agreed. Based on certain factors we have discussed so far, a firm may struggle to meet the terms of the selling shareholders’ earn-outs.
It can be concluded that globalization perhaps has had a role to play in cross border mergers and acquisitions. As businesses cannot remain stagnant and restricted as competition drives growth, which in turn, drives the need for firms to collaborate and pooling of resources in order to expand. It has been argued that the challenge in making mergers and acquisitions work is people management. There are various factors which affect the inflow and frequency of cross-border mergers and acquisitions across the globe, however, there are a growing number of international mergers, and it will only be more common in the years to come. International mergers comes with its challenges but with the right selection of key players in the process and exercise of due diligence, many of these challenges can be avoided.