Benefits of Cross Border Mergers and Acquisitions

Benefits of Cross Border Mergers and AcquisitionsIn the growth of businesses creating or building sh atomic number 18holder value, they the management are motivated to under keep cross leap optical fusions and acquisitions in new(prenominal) to expand their operations which ordain thence generate greater profits or potential for owners (shareholder) value creation than that of internal increment. Cross-border mergers and acquisitions (MA) internationally turn in played a key part in this issue of globoseisation or ball-shaped employment of growth and expansion. When firms and companies new(prenominal) known as enterprises continually increase in size, they tend to look for more than funding or peachy from outback(a) their territory (locality) or country of operation which may non be readily available in their home country of operation to further prelude their growth and expansion drive. And this particularly involves transnational firms such as HSBC, British Petrol eum (BP), Vodaf i and Shell for example victorious over companies or businesses in other countries by parting away with huge sums of money. According to Krekel et al.(1969) mergers unremarkably involve businesses or corporations of same or equal size, whilst the acquiring firm in the case of acquisitions tends to be bigger or larger. According to recent trends in cross border mergers and acquisitions (MA), almost of these Multinational Enterprises (MNEs) hit to emerging markets in order to lead charge or buy controlling interest in those markets. The creation of the European Union (EU) internal market on 31 December 1992 (which proves to re chance upon foxiness barriers among member nations) brought about influx of US, Japanese and EU companies holding market positions in EU.And thus the new nineties witnessed more MA involving both local and International partners, with mega mergers between multinationals like DaimlerChrysler and Exxon-Mobil, which transformed global market competition. During this period many businesses in emerging markets were privatised thus creating growth opportunities for MNEs to gain access to antecedently closed markets of enormous potential. The fall in Nations Conference on Trade and Development (UNCTAD, 1998) unfold the driving forces nookie cross border MA as per current globalisation. Practitioners of cross border MA deals encourage deregulating or diversification and liberation of the local and enjoin owned businesses or enterprises, thus affording remote enterprises or businesses in advanced economies to come out directly, joint jeopardize ship or partnership or plain outright take over (UNCTAD, 1999)This paper will try to address the significant benefits and also any(prenominal) pitfalls of cross border, mergers and acquisitions as pertaining to global market growth and expansion of Multinational Enterprises (MNEs) or businesses. UNCTAD, 1999 reports that the transition soldiery nation in a greenfield investm ent or mergers and acquisition stands to benefit in resources or technology. For type the flow of foreign direct investment to a transition host nation will shape up its foreign reserves (Gross interior(prenominal) product). A clear example is the take over of Cadbury UK plc by kraft Company which undervalued these shares (Cadbury) but yet invested in excess of Nineteen billion pounds (19) into the UK economy in the thick of the global economic crunch. According to Razin et al (1998), low level of revenue enhancementes or incentives in whatever European Union (EU) countries, prompted Investors within UK, to move their production wing of their firms from the UK to E U countries in order for these firms to adore stronger market positions. Investors usually consider levy issues before deciding on where to invest or move their investments to. Many a times, investors favour or decide on nations where the tax laws and policies are relaxed thus favouring their social movement in t erms of releasing their investment back with maximum gain.Hitt et al (2001 a,b) described acquisition as the butt by which controlling stake in a business enterprise or venture is purchased by another(prenominal) larger firm via an open market or on an exchange. Acquisition which is otherwise known as Takeover occurs when majority shares or stake in an organisation is purchased by another bigger firm. By this, the bigger firm take control or charge of the assets as sanitary as the liabilities of this target business which now starts its subsidiary. Hitt et al (2000) further saw merger as the fact where two or more smaller corporations decide to pull their resources together in order to become a giant leader in their industry or market. When this happens, a new corporate individualism will adopted thus both companies will drop their old or individual identities and assemble on the new one after an agreement has been reached amongst the parties gnarly. A clear example will be t he ongoing merger agreement being entered into by British Airways and Iberial Air rail lines which aftermath will birth a new corporate identity and image as agreed upon by the parties involved. another(prenominal) example is that of GlaxoSmithKline which involved synergy between two pharmaceutical firms namely Glaxowellcome and Smithkline Becham that merged to form the second largest pharmaceutical come with in Europe. It is worthy to note that synergy will provide more gain since the two companies stands to defecate more when they are together through sharing of ideas and technical know how than being on their own as individual. Thus the equation of one plus one equalling three came to being (synergy theory) through merger and acquisition as beneficial to the two firms that came together as one entity or under one umbrella. Again these large companies or businesses with global repute or stature enjoy tremendous benefits in the area reduction in prices, increasing control of mark et and economies of scale. According to Fatemi et al (1988), even though introducing cross border MA in a near perfect market situation, the owners of the business may not enjoy dividends as per from local operation and this varied valuations for local and international mergers will seek to uncover the imperfect capital market dealings. Pringle (1991) stressed that market accessibility is the main rationale for foreign direct investment. To add to this Harris et al (1991) further elude to the fact that giant or larger companies or firms join with other firms in other nations simply to access their foreign market share. In other wrangling it aids in its saturation into new areas or segments of other markets with no restrictions whatsoever and in addition access credit facilities whilst enjoying tax rebates reserved for local businesses.HOW CROSS BORDER MERGERS AND ACQUISITIONS ARE fit(p)Investors are always drawn to or interested in investing in eminent temporary corporations who are consistent and increasingly growing and engaging in expansion drive of their various businesses or business units. Growth and expansion performance of businesses may be as a result of veracious corporate governance practices and policies adopted by or from the side of Management of that firm in line with that of the growing target market. In the words of Cheng et al (1989) and that of Moore (1996), overseas business owners or investors enjoyed high returns on their investments after being encouraged to put or invest their wealth in financial institutions (bank), extraneous the United States for the simple ground of their good financial health thus, favourable growth rates and high turnover in assets and expansion drive. Among other factors that positively influence cross border dealings in emerging economies like that of Africa, Eastern Europe and South America is profitability and efficiency that stands out as the number one reason. Financiers and investors from both the Uni ted States of America and United Kingdom channel their wealth to some financial institutions (banks) and other businesses in these regions via direct investments or mergers. Hannan et al (2007), Vander (2007) and Pasiouras et al (2007) all consented that investors from the United States will shy away from investing their wealth in those financial institutions that constantly make a shortage after they (investors) have critically scrutinised and reviewed the said financial data, profitability and investor ratios before choosing the right venture to invest in, in order to maximise their wealth. In the words of Hannan et al (2007) a lot of mergers and cross border acquisition happen due to the challenges businesses go through in sourcing for more funds or capital to expand their businesses. Hannan et al (2007) again said many of the larger financial institution (banks) and companies exploit the pickaxe of targeting emerging markets in terms of investing their resources when consideri ng expanding their corporations. The results from this movement by the larger companies will mitigate advance the economies of these target countries where the small firms are located for which coup detat occurred since the cost involved in business deed will be drastically visitd due to the size and capital base of these larger firms. Among other things, cross border mergers and acquisition can occur where there is concentration of similar businesses such as banks in a catchment area or region. line of workes like banks and stores according to Hannan et al (2007) would always want to take their services and operations to the door steps of the clients, thus concentrating on high streets and other prime locations to better meet their clients need as can be attested in the United Kingdom (UK).Another point worth considering in this determinant of cross border acquisition and merger is Taxation. As with most countries, local companies enjoy tax reliefs or exemptions for awhile whi lst foreign companies are made to pay income tax on their local business enterprise as well as foreign income tax. In the words of Scholes et al. (1990), Servaes et al. (1994) and Desai et al. (2002), investors within advanced economies or markets who pay higher taxes tend to invest overseas where they avoid tax and enjoy exemption from foreign or overseas income. For this reason several indices were created by La possible action et al. (1998), useful for eper this larger created affiliation. In these indices there is also rule of law and efficient judiciary process thus ensuring that the rights of individuals are respected by all and sundry. In the same vein, Johnson et al. (2000) agreed with the above avowal with emphasis on minority shareholders whilst the rights of creditors should be enforced when firms default in their payments after notices are served. And net but not the least, there must be fair treatment within the confines of the laws or regulations with respect to com pany directors ( executive director and non executive directors).LIMITATIONSIt is weighty to note that cross-border acquisitions and mergers are not, however, without pitfalls. Irrespective of acquisition being domestic or cross-border, investors experience hassle of over paying thus suffering excessive financing be (Eiteman et al., 2004 pg. 590). Merging corporate cultures between a local firm and an overseas one becomes a problem since regulations for example like governance practices office differ from country to country. Managing the aftermath of cross-border merger and acquisition process is normally characterised by retrenchment to achieve economies of scale and scope in overhead duties or functions. The force of this is unproductiveness among employees of the target company who fear of losing their jobs or been laid off. For example the take over of Ghana telecom by Vodafone in January 2009 saw more than thousand workers being laid off. And their new Chief Executive Kyl e Whitehill indicates that further restructuring is necessary to ensure that the company is able to deliver prudent returns Source Joy Business/Myjoyonline.com/Ghana (July 29, 2010). Even for some top executives, for fear losing their jobs become uncooperative when it comes to merger and takeover talks. United Kingdoms example is the aftermath of takeover of Cadbury UK by Kraft plc from United States which saw the downsizing of over cardinal hundred of its employees after the production plant or unit in UK was relocated in Poland to reduce labour and operative costs. In the words of Hadlock et al (1999), company bosses or executives, for fear of losing their jobs after the takeover will conceal some vital information or be reluctant to provide important data that will aid the investors to properly come to a decision as to whether to invest or not in a target business.Globally, additional problems occur from the part of host countries where their government step in in price discrim ination, financing, employment guarantees, segmentation and general nationalism and favouritism which includes capital flight and coddle practises by foreign investors with the help of personnel in state departments from target nation (see Eiteman et al., 2004 pg. 590). An example is the tone of voice Grain Scandal in Ghana where some ministers connived with foreign investors to cause financial loss to the state is seen as the most corrupt deal in the country (Source newsinghana.com).Also the preparation of final accounts might differ from country to country thus it is advised that there must be consistency in its preparation among subsidiaries of that holding company for easy comprehension. For some countries among emerging economies, the host government creates its own standards which differs from that of substantial economies for example United States where private sectors and the Government set up GAAP with other principals and standards. Radebaugh et al (1997), Choi et al (1 991) and Land et al (2000) all confirmed the differences in the way financial statements are prepared in US, UK and other European countries with makes it difficult for entrepreneurs to understand and compare with similar statements (profit and loss) within sector. According to Ali et al (2000) and egg et al (2000), Germany lacks in the preparation of returns such that investors or entrepreneurs request for more insight to facts from host nations outside that of the financial report. Another area worth considering is disclosure policy pertaining to corporate governance. Unlike the US and UK where disclosure in corporate governance is held in high esteem, that of emerging countries is very low. For instance some open companies and their private counterparts in these emerging refuse to practise international accounting standards been accepted globally and for that reason are reluctant to fully disclose information freely to prospective investors or other trine parties (see UNCTAD 2000). In fact, the ability to successfully complete cross-border acquisition may itself be a test of capability of the MNE in the twenty first century (see Eiteman et al. (2004) pg. 590).SIGNIFICANT ADVANTAGES OF CROSS-BORDER MERGER AND ACQUISITIONCONCLUSIONFinally, managers tend to take uneconomical plans of takeovers. Sometimes, the motives for takeover decisions by managers may be attributed to availability of free cash flow or for no just cause.The number and dollar value of cross border mergers and acquisitions has grown rapidly in recent years but the growth and magnitude of activity is taking place in the create countries, not the developing countries.As opposed to the fighting and scraping for market share and profits in traditional domestic markets, a MNE can expect greater growth potential in the global marketplace. There are a var. of paths by which the MNE can enter foreign markets, including Greenfield investment and acquisition.The drivers of MA activity are both m acro (the global competitive environment) and micro in scope (the variety of industry and firm-level forces and actions driving individual firm value).The primary forces of change in the global competitive environment technological change, regulatory change, and capital market change create new business opportunities for MNEs, which they pursue aggressively.