CROSS BORDER MERGERS

AND ACQUISITIONS
INTRODUCTION
•
Definition – 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.
• 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.
REASONS FOR CBMA

• Globalization of financial markets

• Market pressures and falling demand due to international competition
• Seek new market opportunities since the technology is fast evolving
• Geographical diversification which would result in exploring the assets in other countries
• Increase companies efficiency in producing the goods and services
• Fulfilment of the objective to grow profitably
• Increase the scale of production
• Technology share and innovation which reduces costs
THEORY OF MNE

• Multinational enterprises undertake cross-border mergers and acquisitions for various reasons.
The drivers are strategic responses by Multinational enterprises to protect and augment their
global competitiveness by

• Gaining access to strategic proprietary assets.

• Gaining market power and dominance.
• Achieving synergies in local/global operations and across industries.
• Becoming larger, and then reaping the benefits of size in competition and negotiation.
• Diversifying and spreading their risks wider.
• Exploiting financial opportunities they may possess and others desire.
Internalization theory (aka market imperfections theory)

 firm could give away valuable technological know-how to a

potential foreign competitor
 does not give a firm the control over manufacturing,
marketing, and strategy in the foreign country
 the firm’s competitive advantage may be based on its
management, marketing, and manufacturing capabilities
Knickerbocker Theory
Firms in the same industry undertake FDI at about the same time and
the same locations
Knickerbocker's theory emphasizes on the interdependence of major
players in the same industry. Imitation is the name of the game where
firms try to match each other's moves to keep each other in check so as not
to allow a rival gain a competitive advantage over others.
• Knickerbocker - FDI flows are a reflection of strategic rivalry between
firms in the global marketplace
• multipoint competition - when two or more enterprises encounter each other
in different regional markets, national markets, or industries
Dunning’s eclectic paradigm
Why is it profitable for firms to undertake FDI rather than continuing to
export from a home base, or licensing a foreign firm?
It is based on internalization theory and was first expounded upon in
1979 by the scholar John H. Dunning
• Dunning’s eclectic paradigm - it is important to consider
• location-specific advantages - that arise from using resource endowments or
assets that are tied to a particular location and that a firm finds valuable to
combine with its own unique assets
• externalities - knowledge spillovers that occur when companies in the same
industry locate in the same area
• An eclectic paradigm, also known as the ownership,
location, internalization (OLI) model or OLI framework, is a three-tiered
evaluation framework that companies can follow when attempting to
determine if it is beneficial to pursue foreign direct investment (FDI).
• This paradigm assumes that institutions will avoid transactions in the open
market if the cost of completing the same actions internally, or in-house, carries
a lower price.
Pragmatic nationalism - FDI has both benefits (inflows of capital,
technology, skills, and jobs) and costs (repatriation of profits to the
home country and a negative balance of payments effect)
 FDI should be allowed only if the benefits outweigh the costs
Recently, there has been a strong shift toward the free market stance
creating
 a surge in FDI worldwide
 an increase in the volume of FDI in countries with newly liberalized regimes
OPPORTUNITIES OF CBMA

• OPPORTUNITIES PRESENTED BY CROSS-BORDER MERGERS AND

ACQUISITIONS-
• Opportunity for Learning
• Market Opportunities
• Opportunity to Access Valuable and Complementary Resources
• Increased Opportunities for Innovation
ISSUES AND CHALLENGES OF CBMA
• Political concerns : Political situation has major role in cross border merger
and acquisitions, particularly for industries which are politically sensitive such
as defense, security etc. 
• Cultural challenges :  Several factors such as differing cultural backgrounds,
language necessities and dissimilar business practices have led to fail mergers
in spite of being in the age where we can instantly communicate
• Legal considerations : Various laws in relation to security, corporate and
competition law are bound to diverge from each other.
• Due diligence :  Due diligence can affect the terms and conditions under
which the M&A transaction would take place, influence the deal structure,
and affect the price of the deal.
CONCLUSION

• Cross-border M&A is elaborated as an activity in which an enterprise from one country

buys the whole asset or controlling percentage of an enterprise in another country. 
• Cross border merger and acquisitions is highly advantageous to companies and also
increase its share price but as we saw there are a lot of factors which need to be taken
into consideration to avoid any anomalies.
•  Cross-border M&A has the added challenges of having to deal with both national and
organizational culture differences.
•  It is documented that Cross-border M&A has become one of the leading approaches
for firms to gain access to global markets.